Financial regulators led by the Bangko Sentral ng Pilipinas are poised to implement enhanced rules and regulations for truth and transparency in lending starting 01 July 2012. Circular 730 issued in 20 July 2011 provided a roughly one year period to enable banks to prepare for compliance to the rules which aim to enhance loan price transparency and improve disclosure practices thereby ensuring better consumer protection. While the rules are applicable to all types of loans, the focus is on retail loans such as small business, agriculture and consumer loans that are typically for customers that may be more vulnerable to unfair lending practices.
Under the new rules, banks are required to charge interest on the outstanding balance of a loan at the beginning of an interest period. This rule effectively prohibits charging “flat” interest rates and other methods which misleadingly feature a markedly lower contractual interest rate than the actual Effective Interest Rate (EIR). The EIR is defined in accordance with the Philippine Accounting Standards (PAS) as the rate that exactly discounts estimated future cash flows through the life of the loan to the net amount of loan proceeds. The EIR computation includes all finance charges which include interest, fees, service charges, discounts, and such other charges incident to the extension of credit. This EIR, whether quoted annually or monthly, shall be the only rate quoted in all loan documents including the marketing materials.
The new rules likewise require a standard format of disclosure is provided to ascertain that every borrower is provided with information that he or she needs to know about his or her loan in a manner that is simple and easy to understand. On the part of the credit provider they are better able to present the cost of granting credit from their perspective.
To ensure that there is a level playing field among all credit providers, the BSP also issued Circular No. 754 for non-bank financial institutions (NBFIs) under BSP supervision such as Quasi-Banks, Non-Stock Savings and Loan Associations, Credit Card Companies, Investment Houses and Pawnshops.
The Securities and Exchange Commission, Insurance Commission and the Cooperative Development Authority also issued parallel regulations for credit granting entities under their jurisdiction. These issuances are SEC Memorandum Circular No. 7 Series of 2011, Circular Letter No.: 31-2011 and Memorandum Circular No. 2012-05.
Most recently, the BSP issued Circular No. 755 for other entities not covered by any of the mentioned issuances such microfinance non-governmental organizations (NGOs) and in-house financiers, among others.
The Bangko Sentral is taking deliberate measures to ensure the meaningful compliance to these rules through coordination with the various regulatory agencies as well as with the Department of Trade and Industry and the Department of Interior and Local Government.
The Bangko Sentral strongly believes that this set of rules will upgrade the transparency and disclosure practices of the entire credit-granting industry leading to a more competitive environment among credit providers and, more importantly, ensuring better informed and protected consumers. The initiative is an affirmative response to promote lower cost of credit and also avoid over-indebtedness.