NOMADIC Bedouin tribes have flourished because of oases, where exhausted travelers take refuge.
After facing the wrath of a volcano and a deadly virus, the Filipino people could use an oasis these days, especially as cash flow is drying up. The Bangko Sentral ng Pilipinas (BSP) may have found one.
With the economic recession, monetary authorities decided to provide some relief by putting a ceiling on interest rates for credit card transactions. It is among the recent initiatives of the BSP to rejuvenate an economic desert.
The BSP recently capped the annual interest rate ceiling of all credit card transactions to 24 percent—which is lower than the average of 47 percent—effective November 3. The Central Bank said that the interest rates or finance charges on unpaid outstanding credit card balance should only be 2 percent or lower monthly. This policy reduces the borrowing costs of the clients by a significant amount.
But this oasis seems to be not so welcoming. Industry experts are claiming that the credit card rate cap can adversely impact both the borrowers and financial institutions in the long run. They are worried that some borrowers may find it difficult to secure loan approvals as the banks are seen likely to tighten lending standards.
Meanwhile, there are also concerns over its potential impact on the bottom-line figures of the banking industry.
With all these factored in, a question is begging to be asked: Is capping the credit card rates a painful relief for the borrowers and banks?
IN an interview with the BusinessMirror, Fitch Ratings Inc. and S&P Global Ratings Inc. both agreed that the recent BSP move to cap the credit card charges is providing relief to borrowers.
S&P Analyst Nikita Anand said that the 24-percent ceiling is allowing credit card loans to be more affordable, which can potentially boost the demand for such borrowings.
“For consumers whose incomes were impacted due to pandemic, lower rates will ease the debt-servicing burden,” Anand explained.
The reduction in credit card rates can ease the cash flow burden of the borrowers who are rolling over their loans, said Willie Tanoto, Fitch Ratings’ director for Asia-Pacific banks.
He said that the relief could bring the borrowers—suffering from temporary liquidity problems—back on track with their loan payments.
“But for borrowers who have structural problems with their income and expenditure, the lower interest rates only buy them some time and will not help them stave off default, especially if the economy and job market remain weak,” Tanoto explained.
In an earlier statement, BSP Governor Benjamin E. Diokno said that the interest rate cap is aimed at helping both the consumers and micro, small and medium enterprises amid the pandemic.
WHILE the interest-rate ceiling is providing relief, the Credit Card Association of the Philippines (CCAP) is worried that it can eventually reduce access to credit card loans.
CCAP Director Alex B. Ilagan told the BusinessMirror that credit-card issuers may deny loans to “riskier lower income classes” as a result of the BSP’s decision.
“It will also result in the restriction of credit to existing cardholders with riskier profiles in the form of credit limit reductions or freeze in line increases,” he added, hinting that banks are likely to be more protective of their borrowings portfolio and asset quality amid an ongoing economic crisis.
With this potential scenario, Ilagan said that borrowers with constricted credit lines are likely to access financing from more expensive informal lenders and financial technology (fintech) firms.
Tanoto shares this sentiment.
“With lower returns, banks are likely to accept lower risks too, especially given the current challenging economic conditions,” the Fitch Ratings analyst said.
“This could mean some of the riskier customers may face lower credit limits or have their applications rejected altogether.”
THE BSP Financial Supervision Sector, meanwhile, said that controlling the credit card rates would not impact bank lending standards for credit card holders.
“Banks have room to adjust credit card interest rates given the lower cost of funding; thus, we do not [expect] this to affect banks’ credit underwriting standards,” the BSP unit told the BusinessMirror in an email interview.
The Central Bank said that the Philippines currently has a very low interest environment, which makes borrowing more affordable.
The country’s overnight reverse repurchase facility is at 2.25 percent after the Monetary Board implemented a series of policy cuts—totaling 175 basis points—to inject liquidity into the weakening economy. Overnight deposit and overnight lending rates, meanwhile, stood at 1.75 percent and 2.75 percent, respectively.
Adjusting the finance charges for all credit card transactions, BSP pointed out, is even supported by the banking sector.
In September, the Bankers Association of Philippines said it was important to push for a credit card policy reform during a crisis to aid the borrowers.
The Central Bank said that the financial institutions are for it because it will “help ease the financial burden of Filipino households, including businesses, which are severely affected by the Covid-19 pandemic.”
In addition, the BSP sector said that it has deployed a package of relief measures aimed at encouraging banks to provide financial relief to the clients and incentivizing lending, especially to those vulnerable segments.
THE industry group also flagged the impact of the credit card charge ceiling on the already-troubled bottom-line figures of the banks.
In the first nine months, the Philippine banking system saw its net earnings plunge by 26 percent to P126.78 billion from P171.16 billion year-on-year amid the increasing provisions for potential credit losses.
“The 2-percent interest rate cap may further compress the interest margins of banks, which are already affected by high levels of credit card delinquency and depressed credit card usage volume,” CCAP’s Ilagan said.
The BSP, on the other hand, disagrees.
“The BSP also does not expect this move to significantly affect banks’ profitability,” the Central Bank said.
“Following the series of calibrated policy rate cuts by the BSP, banks have been noted to align interest rates charged on credit card transactions by bringing this down during the first half of 2020,” the BSP unit said. “Thus, the caps do not constitute a major shift away from market rates since these generally approximate the average interest rates currently imposed by major players in the industry.”
Citing previous data, BSP said that the banks are usually recording interest spread ranging from 3.1 percent to 4.2 percent, translating to an average of 3.5 percent.
The same trend was maintained in the first semester, the Central Bank said, noting that net interest margin stood at 3.9 percent. This was close to the level booked a year ago at 3.5 percent, it added.
Still, BSP stressed that the interest rate ceiling is subject to review every six months, promoting sustainable credit card lending in the country.
“Banks/Credit card issuers are also expected to review their business strategies and streamline their operations to be able to continue serving their customers and market niche through affordable credit card pricing under new economy arrangements,” the BSP department said.
ANAND said that the consequence on banks’ net interest margin and profitability will be “manageable,” given that credit card receivables comprise only 4 percent of the total portfolio.
“However, retail-oriented banks with a larger proportion of credit card exposures could see a meaningful impact,” she added.
For 2020, Tanoto said that the credit card rate cap’s impact will be “relatively modest” because it only applies in the last two months of the year.
The Fitch analyst, however, expressed worries on the full-year impact given that the reduction on interest rates was substantial.
“Spread over a full year, however, we estimate that it can reduce banks’ net interest incomes by a few percentage points,” Tanoto explained.
“The upside for banks is that some borrowers at the margin are less likely to default, which can help the banks’ asset quality and credit costs,” he added.
Anand added that banks would also prefer lending to borrowers with a good repayment record to minimize the financial intermediaries’ exposure.
Access to loans
THE credit card penetration in the Philippines is considered very low, according to S&P. Anand said that people outside Manila and Cebu remain underserved and have only “little access to personal loans and credit cards.”
According to preliminary BSP data, only 5.6 million Filipinos are credit card holders as of end-June.
“The number has exhibited some decline on account of availability of alternative digital payment methods in the market,” the Central Bank explained.
In the first half, there were 2 million applications for credit cards, which was lower compared to 2.5 million last year for the same period, the BSP added.
With lower costs for credit card transactions, the BSP Financial Supervision Sector is expecting credit card usage and demand to increase. This, as it anticipates the demand of households and firms to recover in the coming months as the economy fully reopens.
“This is an opportune time to set a lower interest rate for credit cards,” BSP said.
But lower borrowing costs are not enough.
CCAP stressed that the demand for credit card ownership and borrowings hinges on the economic performance of the country. The Philippine economy has contracted in the last three quarters, booking an average of 10-percent drop year-to-date.
The industry group’s leader said that the clients must be able to secure their revenue channels first, which is challenging during a pandemic.
“The traditional sources of income for consumers will have to be restored and banks will have to find better ways to mitigate credit risks and/or improve operational efficiency in order to allow it to finance credit card spending despite more narrow margins,” Ilagan said.
ING Bank Manila noted the economy is plagued with massive joblessness after the lockdown measures slashed productivity, stymied consumer confidence and brought growth engines to a halt.
“Penetration for credit cards may take a hit due to the fact that our job market has been rocked by record high unemployment and incomes will have on average decreased,” ING Bank Manila said. “This may affect the ability of consumers to apply for credit lines given banks’ still-strict adherence to risk profiling.”
Data from the Philippine Statistics Authority shows that the unemployment rate stood at 10 percent in July, which was higher than 5.4 percent last year. It is an improvement, however, from the record high of 17.7 percent in April.
IN the past five years, credit card receivables have been growing steadily.
The credit card loans portfolio stood at P456.74 billion in end-December 2019, which was more than double the P222.31 billion recorded in December 2015.
Nearly all the credit card loans were provided by the universal and commercial banks. In 2019, the big banks registered P456.61 billion in such loans; the remaining P126 million was extended by the thrift banks. The same trend was also observed in the last five years.
ING Bank Manila said that the growth in credit card loans in the past five years may be attributed to convenience shopping.
The bank assumes many shoppers nowadays would opt to use credit cards for convenience shopping or to take advantage of zero interest installment payments. But those faced with cash flow problems may opt to use the credit card as it was originally designed for, as a short-term consumer loan, according to ING Bank Manila.
While the credit card penetration in the Philippines is low, the CCAP said that the number of credit card holders and their average spending have been increasing through the years, contributing to the growth.
Ilagan credited the improvement in spending to the growing middle class in the Philippines.
“This healthy growth rate in the number of cardholders and average spending can also be attributed to the growing affluence of the Filipino middle class as a result of the robust economic growth achieved by the country in the last decade,” Ilagan explained.
As of end-June this year, the banking sector saw its credit card receivables inch up by around 4 percent to P412.71 billion from P396.35 billion year-on-year.
BANKS, credit issuers and other financial institutions have a reason to worry over the capacity of borrowers to pay off their loans given the current slump in the economy.
Joyce Ong, analyst from financial institutions group at Moody’s Investor Service Inc., told the BusinessMirror that the slowdown in economic activities—coupled with high joblessness—is giving both the borrowers and banks great trouble.
“We expect non-performing credit card loans and receivables to increase as rising unemployment and disruption to business activities reduce credit card borrowers’ debt servicing capacity,” Ong explained.
While there is a likely increase in nonperforming loans (NPLs) in general, ING Bank of Manila said those coming from credit cards or consumer loans will be highlighted.
“With incomes constrained, we would expect households to safeguard limited cash for big ticket items such as housing or transportation while other purchases such as smaller items or durables purchased via credit cards likely not covered for the meantime,” ING Bank of Manila added.
But Ong said that the impact of bad loans from credit card transactions on the overall banking portfolio will be “limited” as these only comprise 4 percent of the industry’s loans.
As of end-June, credit card receivables stood at P412.7 billion against the total loan portfolio of P10.82 trillion.
Of these credit card receivables, P23.64 billion is tagged as NPLs, which is 8.87 percent of the total bad loans of the sectors and 5.73 percent of the credit card receivables. This is also higher by 25.74 percent than last year’s P18.8 billion in the same period.
ING Bank Manila said the banks can opt to extend terms of payment to temper outright growth of NPLs.
“However, much of this has been covered by the Bayanihan laws so banks may need to get more creative at retaining customers and at the same time ensuring their financial health to avoid non-performing loans,” ING Bank Manila said.
Under the Bayanihan to Recover as One Act, borrowers are given a 60-day grace period to pay for their principal loan and interest with due dates until the end of the year.
The CCAP, for its part, said that member banks have implemented different internal debt forbearance programs. These include reversal of fees and charges, providing lower interests and restructuring agreements.
Ilagan said these “easy and flexible repayment schemes” are helping credit card holders to repay their debts.
CREDIT card holders are advised to be vigilant amid the increasing number of scammers trying to trick the public into giving out personal information.
Preliminary data show that credit card-related crimes remain a top concern,” the Central Bank said.
The BSP are reminding the public of the various attempts to illicitly gather the personal, banking and credit card information of the clients. CCAP said these include credit card number, expiry date and verification code.
BSP is urging the credit card holders to “exercise caution in undertaking financial transactions, whether online or in-person, to protect themselves from any form of unauthorized or fraudulent transaction.”
CCAP’s Ilagan, meanwhile, said Filipinos should also be cautious when opening suspicious emails asking for their banking information. Many phishing emails are appearing to be legitimate now, he explained, reminding them not to be deceived.
Should the clients receive one, Ilagan is advising them to call their banks first to verify if the email is authentic.
In addition, credit card holders should regularly monitor their accounts and transactions via mobile banking apps or e-statements, he said. By doing so, Ilagan said that the clients could report suspicious transactions immediately.
On the other hand, the Central Bank said that the banks and credit issuers are rolling out measures to strengthen cybersecurity. These include enhancing capabilities to detect and responding to cybersecurity threats and fraud.
“Banks are also required under the existing BSP regulations to investigate reports on, and incidents of unauthorized and fraudulent transactions and to have in place a consumer assistance mechanism to be able to properly respond to consumer complaints,” BSP added.
AS innovation accelerates in the digital age, fintech has been gaining traction as an alternative source of credit.
“The BSP has strategically opened the banking system to competition coming from new players, whether from banks or non-banks, including fintech firms,” the central bank said.
The BSP said that “promoting healthy competition” in the sector is most beneficial for the consumers as market players will be encouraged to expand the menu of affordable financial products and services, improve customer experience and support the financial inclusion initiatives.
With the emergence of fintech firms, BSP said that credit card issuers will find ways to be more creative in extending customer-centric products and services.
“Nonetheless, the BSP is also mindful of the attendant risks and unintended consequences posed by fintech innovations,” the Central Bank said. “The BSP is closely monitoring fintech activities and has adopted regulations to mitigate risks arising from these activities and uphold consumer protection standards.”
S&P’s Anand said that low-cost operations can help the fintech players provide credit cards and small loans at cheaper rates than traditional banks. They can even corner the mass-affluent market given these firms provide “significantly superior and cheaper products and services,” she said.
“Digital players also need to earn consumers’ trust, which traditional banks have locked in,” Anand added.
For its part, FintechAlliance.ph said that fintech players offering alternative lending is not about competition.
“The bottom line is really more providing an enabling environment for various players allowing Filipinos greater access to responsive and responsible finance,”
Angelito M. Villanueva, the fintech group’s chairman, told the BusinessMirror.
“It is about providing consumers a wide array of options for them to choose from while providing them with adequate financial education and digital literacy,” Villanueva added.
According to Fintech Report Philippines 2020, there are around 200 fintech companies in the country, and 24 percent of them are providing lending services.
WITH the country’s economy still suffering, is it still wise to keep a credit card line? CCAP said yes.
Ilagan said that credit cards provide a standby line of loans that the Filipinos can use for emergencies.
However, he emphasized that card holders should be responsible when using their line of credit, making sure that they are borrowing amounts they can pay eventually.
“A credit card line of credit is not a source of free money, so all of their purchases should still be done prudently, and the minimum amount due every month should be paid on time to avoid penalties,” Ilagan explained.
Earlier, the CCAP told the credit card holders to maintain a good credit standing even during a pandemic so they can ensure financing even after the ongoing economic and health crises, especially if they need additional funding sources as they return to their usual lives.
Ilagan said that clients can do so by paying their bills on time. At the same time, it is best for them not to max out their credit limits as it can reduce credit score, he added.
Still, the recovery of the economy is seen playing a key role in the capability of borrowers to keep a good credit standing. A revitalized revenue channel for both corporates and individuals can mean a giant leap away from the pandemic-induced crisis. It restores their capacity to settle their loans on time.
But with the current economic situation, it appears that more steps are still needed to be taken before the Philippine leaves this desert called pandemic.
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