Like water seeking the lowest level to move on, interest rates on credit cards should go down when exposed to competing market forces.
Putting a cap on interest rates will not necessarily bring down the cost of borrowing and protect consumers from high prices. Rather, the cap gives consumers limited options on their money.
They will be subjected to price control, which we all know leads to production inefficiency and offers no leeway for costs to go down.
The Bangko Sentral ng Pilipinas (BSP) seems to be ignoring the gravity force with its plan to adjust the cap on monthly interest rates on credit card debt to 3 percent from 2 percent.
The plan goes against the principle of allowing market forces to dictate the pricing of products–in this case the interest rate on credit cards.
Politicians, naturally eager to score “pogi” points to their constituents, offered their two cents’ worth to get the attention of consumers and voters in the next elections.
Rep. Joey Salceda, for one, said lifting the interest rate cap as favored by many banks would only result in lenders increasing their profits at the expense of consumers, who would pay the higher cost of borrowing.
Rep. Luis Campos Jr.,.on the other hand, called on the cap to be retained to provide financial relief to consumers reeling from the impact of more expensive basic goods.
Having the cap in reality is an anti-consumer initiative. To promote the welfare of consumers, the best route is to lift the cap and let the private sector determine interest rates on credit cards.
It goes without saying that the BSP’s plan is not the ideal course of action for consumers.
The primary reason why the cap is anti-consumer is because it makes the approval of getting a credit card harder for many Filipinos.
To determine who should get a credit card, banks rely on several factors, such as the track record of paying debt and annual income. When a bank accepts a person’s credit card application, it sees that person as responsible enough to pay the debt, along with the applicable interest payments, on time.
Lower interest rates are usually reserved for people of good financial standing, or those who have a stable source of income and have proven they can back their debt on time. Higher interest rates, meanwhile, are reserved for first-time borrowers or those who cannot pay their debt on time.
The cap inadvertently forces banks to give credit cards to people of good financial standing and eschew first-time borrowers and other subprime borrowers as banks could think they are taking too many risks in giving credit cards to them.
From the point of view of the banking industry, the cap hurts its business as lenders are being forced to limit their products to good financial standing. The cap, thus, restricts the potential of credit card products to deeply penetrate the market.
This hurts consumers, too. While there may be alternatives to credit cards such as GCredit or Atome, there are not too many options for consumers in the market for now.
Lending products in the market currently have a low penetration rate given that most Filipinos borrow from their families and relatives. There are those who even borrow from gray market lenders, such as the so-calles “5-6.”
The cap makes it harder for credit card products to realize their full potential in the Filipino market. That, in turn, has an effect on the progress of financial inclusion in the Philippines.
Should the cap be lifted, some banks could initially offer higher interest rates than others. But due to competition, they cannot charge too high because it will drive consumers to choose other banks that offer lower interest rates.
It is even possible to never pay any interest on credit card debt at all. A consumer can do this by paying his debt before the due date comes.
Fortunately, banks in general offer interest-free periods lasting a few weeks—which can make settling payments easier for consumers.
Any cap set by the BSP brings more risks than benefits to consumers. It must be lifted completely.
However, one should note that the benefits will not be felt immediately. The market would need time to adjust to the new operating environment created by the policy of lifting the cap.
In public policy, it is important to implement measures that benefit the consumers in the long run.
Lifting the cap falls under that, and that’s all that matters despite the expected backlash from politicians.