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Finally, lower credit card rates, charges

"But 24 percent per year is still the highest in nearly all of Asia."

 

Finally, after allowing the banks and their credit card issuing subsidiaries make piles and piles of money, with untrammeled abandon, at the expense of consumers and the cardholders, the Bangko Sentral ng Pilipinas has put a stop to their practice of onerous and extortionate charges that cry to high heavens for justice.

The Monetary Board last week approved to cap the interest rate and penalties the card companies can charge. The ceiling is 2 percent per month or 24 percent per year. The ruling is effective Nov. 3 and could be renewed every six months.

The ceiling covers interest rates or finance charges on the unpaid outstanding credit card balance of a cardholder.  It should not exceed 2 percent per month.

Also, no other charge or fee may be imposed or collected on credit card cash advances except for a maximum processing fee of P200 per transaction.

“The interest rate cap on credit card receivables aims to ease the financial burden of consumers and micro, small and medium enterprises amid a difficult economic environment caused by the COVID-19 pandemic,” said Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno.

The BSP circular pegs a separate interest rate ceiling for credit card installment loans, just a 1-percent add-on.

Since these are ceilings, the card companies may charge lower interest rates, if they want.  But I doubt that they will have the kindness of heart and generosity of spirit to do that, especially in these difficult times when the banks need to raise funds elsewhere to make up for pandemic-induced losses and reduced business.

In a press statement, BSP said its reform initiative is pursuant to the BSP’s supervisory authority over all credit card issuers under the Credit Card Industry Regulation Law.  It is also seen to promote responsible credit card lending in the country.

“Amid the rising use of electronic platforms for payments, the issuance will enable credit cardholders to settle financial transactions under more affordable pricing terms,” according to Governor Diokno.

The setting of a maximum ceiling on interest or finance charges on credit card transactions is also in keeping with the country’s current low interest rate environment.

The new regulation also waives the requirement for credit card issuers to notify the cardholder of the said changes on interest or finance charges at least 90 calendar days before such changes take effect.

Diokno has been a very pro-consumer and pro-people BSP governor, making him my No. 1 candidate for best central bank governor ever.

The series of interest rate cuts he has ordered since the pandemic broke out in March this year and the BSP liquidity measures to pump cash into the battered economy have meant additional P1.5 trillion in the hands of consumers and the financial system. 

The Philippine is in a recession, the deepest and the worst in the country’s history.  So the moves to refloat the economy should also be unprecedented.

The P1.5 trillion may not be enough. It is just 7.6 percent of our 2016 GDP.  The average stimulus spending in other countries is at least 15 percent of a country’s GDP.  Our GDP, or the size of the economy, is P25 trillion.  About 15 percent of that is P3.75 trillion.  Other countries have pumped as much as half of the value of their economy to refloat their economies.

At the same time, the interest rate on the BSP’s overnight reverse repurchase (RRP) facility remains at 2.25 percent. This has been the lowest policy rate since the beginning of the pandemic.

Ben, however, should have done more good if he pegged credit card interest rates with those in the ASEAN region – about 16 to 18 percent per year.  The 24 percent per year is still the highest in nearly all of Asia.

But the 24 percent has been a deep cut.  The previous rate was 3.5 per cent per month or 42 percent per year— among the highest in the world.

Diokno has called the 42 percent annual rate unacceptable.

Per BSP data, banks have total credit card receivables of P446 billion.  Apply 42 percent of that and you get P187.32 billion in whopping revenues for the banks as finance charges. Apply 24 percent of P446 billion and you get P107 billion.  Deduct P107 billion from P187.32 billion and you get P80.32 billion—that is the amount card holders will save, in theory, if credit card finance charges are cut to just 24 percent.

Actually, 42 percent is just a starting rate.   The credit card companies charge an additional 5 percent for failure of cardholders to settle bills on time, which usually happens because the banks send their bills late or not at all (there is a fee of P200 for sending those bills), or use intricate passwords before the cardholder can decipher his balance due online.   Also, in the statement of account, the card number is not indicated, only the “customer number” is shown; so the cardholder doesn’t know which card he is actually trying to pay, if he has many cards.

The 5 percent add-on makes the monthly interest rate 8.5 percent (3.5 plus 5) or an effective annual interest rate of 102 percent; the banks double their money in just one month. 

In a previous column, I said not even bank robbery can match that kind of profit-making by banks from their credit card operations, a no-sweat business. If you assume credit card bad loans average 5 percent of receivables, 102 minus 5 still leaves the banks with a 97-percent return. 

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Topics: Tony Lopez , Bangko Sentral ng Pilipinas , BSP Governor Benjamin E. Diokno , credit card rates , charges
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