Unconscionable lending rates

It’s time to seriously address a fraught burden faced by ordinary consumers seeking temporary financing for household needs and budding micro entrepreneurs with no access to traditional bank lending: exorbitant interest rates.

The recent crackdown on unlicensed online lending companies should now be followed by a move to cap how much authorized lending companies can charge their borrowers.

The Securities and Exchange Commission describes the practice as “predatory lending,” which the agency wants stopped. It has asked the Bangko Sentral ng Pilipinas to put a limit on interest rates and other fees that money-lending companies could charge on consumer and pay-day loans (borrowings that are repaid on installment every 15th or 30th of the month).

In an Oct. 8 letter to Bangko Sentral Governor Benjamin E. Diokno, SEC chair Emilio Aquino noted that the policymaking Monetary Board of the Bangko Sentral has the power to fix maximum interest rates, fees and other charges that lending and financing companies could impose.

The Lending Company Regulation Act of 2007 allows lending firms to loan money to borrowers at “reasonable” rates and charges. It provided that the Monetary Board, in consultation with the SEC and other stakeholders, may set ceilings on interest rates depending on prevailing economic and social conditions.

“Predatory lending continues to be one of the major subjects of complaints that the commission receives from the public,” Aquino noted in his letter. He lamented that lending and financing companies charge as much as 2.5-percent interest a day “on top of other fees and charges.”

A rate of 2 percent a day is 60 percent a month, or a mind-boggling 720 percent a year. This is way more atrocious than high credit card rates of more than 2 percent a month, or over 24 percent a year. In contrast, banks charge prime borrowers less than 10 percent a year.

The Bangko Sentral should move quickly to put a cap on interest rates as requested by the SEC. The ceiling would not apply to the whole financial sector, but only to consumer loans and pay-day loans that lending and financing companies offer ordinary consumers. The various complaints received by the SEC relating to outrageous interest rates should be reason enough to act.

This issue also relates to one of President Duterte’s campaign promises more than three years ago, that of clamping down on the 5-6 lending scheme victimizing ordinary Filipinos and small entrepreneurs.

Borrowers of a 5-6 lending scheme pay an exorbitant interest rate of 20 percent a month, which many Filipinos are nevertheless forced to tap because they are hard-pressed to go through the tedious loan processing of banks, or do not have the documents and collateral required when borrowing from traditional financial institutions.

The Philippines used to have an anti-usury law that set a cap on the interest rate on loans. However, it was suspended in 1983, and efforts to revive the law have languished in Congress. It was scrapped on the belief that the court can decide whether or not an interest rate in a loan agreement is acceptable once a case is brought before it. But everyone is acutely aware of how slow the wheels of justice move in this part of the world, and how the expenses and effort for such litigation may, in the end, prove even more costly than the money matter in question.

The Supreme Court had already noted in previous rulings that while the usury law was suspended by Central Bank Circular No. 905 effective Jan. 1, 1983, and that parties to a loan agreement were given wide latitude to agree on any interest rate, “nothing in the said circular grants lenders carte blanche authority to raise interest rates to levels which will either enslave their borrowers or lead to a hemorrhaging of their assets. The stipulated interest rates are illegal if they are unconscionable.”

An interest rate of 2.5 percent a day is truly unconscionable. The Bangko Sentral needs to cap interest rates on consumer loans and pay-day borrowings, and Congress should look into reviving the anti-usury law.