BSP extends repayment period for salary-based loans

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) has extended the maximum repayment period for salary-based consumption loans to seven years, a move meant to make amortizations more manageable for borrowers while keeping safeguards against excessive debt.

In a statement, the BSP said the longer period would apply to all borrowers, including teachers and other employees availing of salary-based general-purpose consumption loans.

“The longer period makes loans easier to repay while still encouraging responsible borrowing,” the central bank said. “At the same time, the seven-year limit serves as a safeguard against excessive borrowing.”

The policy, contained in BSP Circular 1239 signed by BSP Governor Eli Remolona Jr., amended existing rules on salary-based general-purpose consumption loans under the Manual of Regulations for Banks and the Manual of Regulations for Non-Bank Financial Institutions.

Previously, salary-based general-purpose consumption loans were generally limited to three years and could only be extended to five years in meritorious cases.

Under the new rules, the BSP clarified that the seven-year period is the maximum allowable tenor and not a fixed loan term. Banks and other BSP-supervised financial institutions must still assess each borrower’s capacity to pay before setting the actual repayment period.

Salary-based general-purpose consumption loans refer to unsecured loans granted mainly on the basis of a borrower’s regular salary, pension or other fixed compensation. These loans may be used for education, hospitalization, emergencies, travel, household expenses and other personal consumption needs.

The circular also requires financial institutions to maintain board-approved credit policies that are documented, periodically reviewed and consistent with sound credit standards.

Lenders must conduct a comprehensive assessment of the borrower’s creditworthiness. The BSP said credit scoring models may be used, but formula-based metrics such as salary multiples or affordability ratios should not replace a full credit assessment.

Financial institutions must also consider the borrower’s total personal and household indebtedness, co-maker or co-borrower exposures and disposable income available for family and personal needs after debt servicing. They should verify borrowers’ total indebtedness and repayment history, including through relevant credit bureaus or entities.

The BSP also tightened rules on loan renewals and maturity extensions. No renewal or extension may be granted without a reassessment of the borrower’s repayment capacity and confirmation of continuing creditworthiness.

The central bank said accrued interest must be paid and the outstanding principal reduced through actual payment before a loan may be renewed or extended. Lenders must also establish a clean-up policy and put in place controls to prevent continuous loan renewals without reduction in principal.

For borrowers with longer-term or non-consumption financing needs, the BSP said other products such as housing loans, motor vehicle loans and credit card loans may be more appropriate. These are outside the scope of salary-based general-purpose consumption loans even if repayments are made through salary deduction or similar arrangements.

The BSP said it continues to work with the Department of Education and partner financial institutions to promote financial literacy and responsible borrowing, including efforts to ensure that borrowers retain enough take-home pay after loan repayments.

It added that borrowers may also explore refinancing options through facilities offered by institutions such as the Government Service Insurance System and the Social Security System.