BSP bans flat rates on loans

MANILA, Philippines - Banks and other lending institutions are no longer allowed to offer flat interest rates on loans as the Bangko Sentral ng Pilipinas (BSP) implements circulars updating rules of a 1963 law that enforces transparency in credit lending.

BSP Deputy Governor Nestor Espenilla said yesterday the new circulars want to establish discipline and responsibility among credit granting institutions.

“Interest should be based on outstanding balance of a loan. In reality however, what we have observed is that interest rates are charged to initial balances, even if it has declined,” Espenilla said.

“Flat rates are no longer allowed since they tend to confuse the public,” he added.

A flat rate is when lenders charge a fix interest rate to a particular loan within a certain maturity. Espenilla said this tend to be “appealing” to borrowers, especially since they are “easy and seems to be more understandable” than a declining interest rate.

A declining rate, he explained, is when the interest is based on the balance of the loan plus all the fees and charges computed every paying period. In this way, Espenilla said a lender is being transparent as to the true cost of the loan.

“But the loan is not necessarily more expensive. You are just being transparent,” Espenilla explained.

He cited a case when a borrower of P10,000, with a term of 13 weeks, was charged with 1.5 percent flat monthly interest rate plus a separate three percent rate as “other charges.” The P803.85 weekly amortization will be the same for a P10,000 loan with a term of 13 weeks and has a declining interest rate of 4.77 percent.

In the second instance, “the total cost of the loan involved the interest, fees, service charges, discounts, and all others incident to the extension of credit,” Espenilla said, noting that fees and charges are part of the “mandatory disclosures” provided under the BSP Circular 755.

“The challenge here is really the enforcement. We made a comprehensive effort in drafting these rules and now our efforts will shift to making sure that these regulations will stick toward enforcements,” Espenilla said.

Lending institutions that will be found not following the new rules will be sanctioned accordingly, he added.