Toward a more robust and transparent consumer lending

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In 2017, consumer loans in the Philippine banking system reached P1.49 trillion, up 17.3% from the P1.27 trillion worth of consumer loans recorded by the end of 2016, according to data from the Bangko Sentral ng Pilipinas (BSP). Also by the end of last December, the nonperforming consumer loans to performing consumer loans ratio stood at 3.86%, the lowest recorded ratio that year.

“After enjoying significant growth in 2017 thanks to the favorable economic background,” the market research firm Euromonitor International said, “in 2018 consumer lending in the Philippines showed signs of stabilization amidst regulatory changes.”

One important change the firm highlighted in its report about consumer lending in the Philippines is the Tax Reform for Acceleration and Inclusion (TRAIN) law, which came into effect at the start of the year. Because of TRAIN, personal income taxes are now lower for many Filipinos (those earning P250,000 or less are exempted). But taxes on sugar-sweetened beverages, petroleum products and automobiles are now higher.

Euromonitor International noted that while banks and nonfinancial institutions were improving their consumer lending offers, the willingness of the consumers to grab those offers was tempered by the drastic change in the income tax regime and the adjustment of several excise tax rates TRAIN entailed.

“The disruptive changes that resulted from this law led to increased caution among lenders, consumers and businesses across all industries,” the firm said.

Still, consumer loans as of June 2018 amounted to P1.57 trillion, while the ratio of nonperforming consumer loans to performing consumer loans was 3.97%.

According to Oxford Business Group (OBG), which publishes business reports about different economies, particularly the emerging ones, “[c]apitalizing on growth opportunities in the relatively untapped consumer lending segment will be an important priority for the banking system.”

In an online article, OBG explained that boosting consumer lending will be important because the consumer segment, compared with low-risk corporate lending, offers higher interest margins. And for that reason, it can help improve bank profitability significantly.

Earlier this year, a central bank official said that consumer lending will be a main battleground for banks over the next few years.

“I think the battle would really be on the retail banking. Given advances in technology right now, it’s really more on the digitization — that’s where the battle will be in the next couple of years,” BSP Deputy Governor Chuchi G. Fonacier was quoted as saying in a BusinessWorld report. “The name of the game would really be digital over the next couple of years.”

The report went on to say that an openness to new technology would help local players maintain a comparative advantage over foreign banks that are looking to penetrate the local market and capture a slice of it.

“I think they (local banks) are well-positioned when it comes to competition, but what’s critical is for domestic banks as well to embrace digital transformation because that’s where the future is leading us when it comes to banking,” Ms. Fonacier said. “For as long as a domestic bank would embrace such kind of advancement and development in that space, then they are well-positioned to compete.”

Meanwhile, Euromonitor International noted that emerging players that target unbanked Filipinos are expected to perform well.

“Lenders actively targeting the unbanked population in the Philippines with easily accessible loans that offer attractive terms have the potential to perform strongly over the forecast period. This is especially true of those utilizing mobile apps and online platforms, as Filipino consumers tend to be quite tech-savvy,” the firm said.

It added that attractive offers from fintech companies are set to boost small-ticket loans. Some of these companies offer loans that are as small as P5,000, that are subject to an interest of less than 3%, and that borrowers can pay within 45 days.

An S&P Global Ratings report released in May of this year noted that the Credit Information Corporation (CIC), which is a partnership between the Philippine government and the private sector tasked with collecting credit-related data from financial institutions and other sources, will help strengthen the underwriting standards in the consumer lending segment in the country to achieve better transparency, which will lower banks’ nonperforming consumer loans.

That May, the credit rater upgraded its Banking Industry Country Risk Assessment score for the country’s domestic banking industry to “6” from the previous “7.”

“We revised our Banking Industry Country Risk Assessment (BICRA) on the Philippines to group ‘6’ from group ‘7’ due to the sector’s improved credit fundamentals,” S&P said.

The debt watcher said the credit risk in the country had declined owing to “the establishment of credit bureaus and the banks’ improving underwriting practices in the consumer loans segment.”

“Better data availability of credit history is positive for this segment where credit quality has historically been constrained by lack of information,” S&P said, which added that clarity on creditworthiness should also foster risk-based pricing.