Consumer protection

Bangko Sentral ng Pilipinas Governor Amando Tetangco said something truly important at the gathering last week of the Chamber of Thrift Banks. In his speech, Tetangco said the BSP was drafting rules that would compel banks to improve on the ways they protect consumers. He said it would formalize “specific standards for consumer protection, including how banks should handle consumer complaints,” the goal being “to elevate consumer protection to a stature of a core bank function, and not simply an ancillary advocacy.”

Specifically, the BSP is looking into how to assess banks’ consumer protection practices, similar to the Camels rating system (which grades a lender based on its capital adequacy, asset quality, management, earnings and liquidity). “We are still looking at the appropriate metrics for this. But the idea is to ensure that banks have the adequate framework for consumer protection,” Tetangco said. “This will be embedded in the assessment of the performance of the banking institution. The BSP will have a rating system as far as consumer protection is concerned.”

In the meantime, Tetangco advised bankers to tighten the safety standards in their credit operations given the sustained expansion of consumer-related financing. He urged banks to strengthen their credit underwriting standards, especially for their real estate loans, which constitute a big chunk of their loan portfolio. It is worth pointing out here that banks should also be urged to tighten their standards in granting credit card loans, or the issuance of the credit card itself. Everyone knows how easy it is to get even multiple credit cards, with some issuers flooding shopping malls with their marketing people or employing telephone brigades to call random targets.

There are an estimated four to five million holders of credit cards in the country. The latest BSP data on credit card loans that turned bad put the amount at P18.35 billion, or 11.1 percent of the P165.3 billion in outstanding credit card loans as of end-June 2012. The figure is up from P145.2 billion in the same period of the previous year. Nonperforming loans, as defined by the BSP, are past-due accounts whose principal or interest is unpaid for 30 days or more after due date.

The percentage may be considered prudent in banking standards, but the absolute amount remains big no matter how one looks at it. In fact, this amount has a direct bearing on the interest rate charged on all other credit card loans. Because banks hold no collateral for the credit card loans that have turned sour, it has to recover that amount from all the other card holders through higher interest charges. The current rate of 2.5-3.25 percent a month for credit card loans is equivalent to an interest charge of 34-47 percent a year.

Interest rates on credit card loans in the Philippines are among the highest in the world because high-quality borrowers are shouldering the cost of the bad credit card debts. Ideally, one who has diligently been paying his/her credit card bills on time for the past five or 10 years should be charged a lower interest rate than one who has just been employed or is holding a credit card for the first time. But despite available bank data that can easily determine the credit standing of individuals and allow lenders to determine the quality of borrowers and set different rates, banks simply charge high interest rates on all credit card debts.

The BSP should require credit card issuers and the banking sector to address this issue. They should devise a way in which the good borrowers are rewarded with a lower interest rate. These lenders should be required to impose graduated interest rates on credit card borrowers; the more risky individuals (those with no track record of payment) should shoulder higher interest rates, with the rate declining as the quality of the borrowers improves.

This is a more palatable solution than a cap on interest rates, which certain legislators proposed in 2011, following mounting complaints from card holders against the “usurious” rates charged by banks.

The Philippines can follow what the United States did when it adopted the Credit Card Act of 2009, which puts more emphasis on the protection of consumers in terms of unwarranted increases in fees and charges. Monetary authorities can start by prodding banks to help consumers by classifying or ranking their credit card holders, in the process rewarding their good clients with lower interest charges.