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Finance charge cap seen to hurt banks
By Luz Wendy T. Noble, Reporter
THE proposed cap on credit card finance charges will weigh heavily on banks amid the coronavirus crisis, an analyst said.
Despite this, industry groups on Tuesday backed the Bangko Sentral ng Pilipinas’ plan to implement a 24% interest rate limit on credit card installment payments and cash advances in a bid to provide relief to consumers.
Fitch Ratings director for APAC-Banks Willie Tanoto said the move to cap credit card finance charges, if implemented, will be “significant” during a crisis when lenders are experiencing slimmer margins and slower demand.
“The effect of an interest rate cut [on credit cards] will be significant, especially during a time when banks are facing narrower (net interest margins) and lower credit demand,” Mr. Tanoto said in an e-mail.
The Bankers Association of the Philippines (BAP) and Management Association of the Philippines (MAP) expressed support for the BSP’s proposal.
“We welcome this initiative of the BSP and hope that this collective effort of the banking industry will help ease the burden of our credit cardholders during these challenging times,” BAP President and Bank of the Philippine Islands President and Chief Executive Officer Cezar P. Consing was quoted as saying.
“[The] BSP Governor’s (Benjamin E. Diokno) proposal, coupled with the 60-day payment deferment under the Bayanihan to Recover as One Act, will provide big relief to businesses and individuals using credit cards, many of whom have found themselves jobless as a result of the pandemic,” MAP President Francisco E. Lim said in a separate statement.
Mr. Diokno has said some credit card charges rise to “about 40%,” which is “unacceptable.”
“It’s for fairness, and maybe as a result, more will be inclined to use the credit cards with much lower interest rates,” Mr. Diokno said in an interview with ANC on Monday, noting key policy rate or overnight repurchase facility is at a record low of 2.25%.
From a consumer perspective, Fitch’s Mr. Tanoto said lower interest rates will have a limited impact on bringing down risks related to credit card defaults as borrowers face lower income and unemployment.
Mr. Tanoto said banks may tighten approval criteria for credit card applications and trim reward offerings as well.
“A bank could conceivably also make up for some of the lower revenues via other non-finance charges means, e.g. from higher late payment charges, higher loan service fees, etc. Until the BSP formally provides implementation guidelines, it is unclear if these will be similarly restricted,” he added.
Joyce Ong, an analyst at the Financial Institutions Group of Moody’s Investors Service, said the proposal’s impact will be “diluted” for banks with lending that are more focused on large corporates. However, this could dent growth for lenders that are seeking to expand their credit card businesses, she added.
“Banks that have been growing their SME (small and medium-sized) and retail portfolios, including unsecured credit card loans, as part of yield-enhancement and diversification strategies are more affected,” Ms. Ong said in an e-mail.
On the other hand, S&P Global Ratings analyst Nikita Anand said the proposed cap will have a “marginal impact” on credit cards as they only make up about 4% of the industry’s total loan portfolio.
“With the proposed cap, credit card interest rates will be broadly comparable to peers in the region,” Ms. Anand said, noting the caps on credit card charges with different levels are already imposed in Malaysia, Thailand, and Indonesia.
Lending disbursed by big banks totaled P9.28 trillion in June, up by 9.6% from the P8.47 billion a year ago but lower by some P107 billion from the May level, data from the BSP showed.
Credit card loans grew 28.4% to P410.39 billion in June, a slower growth against the 34.3% expansion seen in May when the loan disbursements for the segment hit P418.885 billion.