BSP, banks lukewarm on credit card interest cap

MANILA, Philippines - The Bangko Sentral ng Pilipinas (BSP) is lukewarm to the proposed imposition of a cap on interest rate charges imposed by credit card companies as the move could only introduce distortions in the credit market.

In a position paper submitted to the committee on banks and financial intermediaries of the House of Representatives chaired by Rep. Sergio Apostol, the BSP said it supports the principle of market-determined pricing as the best way to serve the interest of the public and the most effective way of allocating credit.

“This market-oriented interest rate policy allows market forces to determine the interest rates that apply to loans and other financial transactions,” the BSP said.

It added that the BSP only sets the interest rates for the central bank’s overnight borrowing and overnight lending facilities to influence the cost and availability of money and credit.

There are seven bills pending before Congress seeking to set ceilings on interest rate and other charges on credit card transactions to help cardholders who are experiencing financial difficulties. These include House Bills 1561, 1900, 1919, 2195, 3015, 3410, and 3824.

The BSP warned that setting of interest rate would “invariably fuel the moral hazard and adverse selection problem that underpin a credit rationing framework.”

Based on past experience with interest rate-setting made apparent limitations of an administratively fixed interest rate and prompted the eventual shift to market-oriented interest rate policy in 1983 through Central Bank Circular No. 905.

The BSP explained that it could not impose a statutory ceiling on interest rates as this would undermine the ability of financial institutions to price their credit exposures based on the underlying risk profiles on their client resulting to more stringent requirements leading to reduced credit availability.

“The reimposition of interest rate ceilings would only introduce distortions in the credit market,” the BSP stated in the 14-page position paper.

According to the paper, there would also be costs associated with enforcing interest rate ceiling through increased burden on banking supervision and policy consistency in regulating fees and surcharges.

The BSP reiterated that the adoption of a market-based interest rate policy is intended to ensure adjustment of interest rates in line with changes in market conditions and to facility transfer of policy signals to all sectors of the economy.

It added that it is also intended to promote efficient and effective financial intermediation of funds between savers and borrowers.

The BSP said the BSP’s Monetary Board “may eliminate, exempt from, or suspend the effectivity of, interest rate ceilings on certain types of loans or renewals thereof for forbearances of money, goods, or credit whatever warranted by prevailing economic and social conditions” under Republic Act 2655 or the Usury Law.

For its part, the Bankers’ Association of the Philippines (BAP) said the imposition of a cap on interest rate would result to lower credit extension.

“Given the proposed cap on interest rates, credit card businesses may be compelled to close its operations,” BAP president Aurelio Montinola III said in a position paper.

Montinola said the closure of credit card companies would force borrowers to return to the informal sectors such as as the black market or “five-six” that charge interest ranging from 20 percent to 240 percent per annum resulting to lower tax collections.

Data from the BSP showed that there are 19 credit card issues including 15 universal and commercial banks as well as their subsidiaries and four thrift banks.

About 6.7 million credit cards are in force while credit card receivables stood at P111.88 billion as of end September 2010. About 13.2 percent of the total receivables are non-performing.