Card Industry Rails Against Philippines Bill That Would Cap Interest Rates

Representatives for the Philippines credit card industry are expressing worry over a bill that would cap card interest rates.

In separate statements submitted to the House Committee on Banks and Financial Intermediaries, the Bankers Association of the Philippines and the Credit Card Association of the Philippines said credit card businesses no longer would be viable if the bill becomes law.

Rep. Arthur Yap of Bohol in December introduced the bill, dubbed the Credit Card Users Protection of 2010, to place a cap on high “finance charges” the country’s issuers levy on their credit cardholders.

Under the bill, companies whose monthly interest rates reach 3.5% would be forced to reduce them to 1% per month or face criminal charges.

In addition, the bill would limit issuer penalty charges to 1% per month whenever the outstanding balance exceeds the prescribed credit limit within a billing period. Issuers currently charge cardholders approximately 500 pesos ($US11 or 8 euros) when exceeding their credit limit.

If the bill passes, heads of credit card issuers found guilty of violating any of the act’s provisions would face up to six years in prison, fines up to 500,000 pesos, and suspension or revocation of their business license.

In a statement, Aurelio R. Montinola, president of the banker’s association, stressed that credit cards are necessary because they enable customers to make purchases for daily necessities and big-ticket items and to pay for a family’s critical expenses when cash is difficult to secure.

Moreover, card issuers invest heavily in the infrastructure, systems and manpower needed to support their operations, Simon A. Calasanz, president of the card association, said in his statement. Capping interest rates and fees potentially could make the issuers’ investment unrecoverable and force them to cease operating, he said.

“It takes years before a credit card company recovers its investments through the interest rates that it places on the credit card,” Calasanz said. “Credit card companies contribute a significant amount in tax revenue to the government, as transactions are easily legitimized with merchants compelled to issue receipts on card purchases.”

And if consumers no longer have access to regulated credit lenders, they likely would turn to the unregulated lending sector, such as pawnshops and loan sharks, that charge even higher interest rates and extend loans of only up to 30% of the collateral value, he said.

Card interest rates have been a topic of hot debate and wrangling in the Philippines over the past year. The country’s Supreme Court in 2009 ruled that charging cardholders an “interest rate of more than 24% per year is excessive and unconscionable.” The court called for issuers charging 3% interest per month to “reduce the rate to 2% per month, or to a maximum of 24% per year.”

In August, the Philippines’ Department of Trade and Industry said it would pass the question of how to handle banks’ high credit card interest rates on to the Bangko Sentral ng Pilipinas, the country’s central bank (see story).

The issue then came back to the Philippines Senate, even as Amando Tetangco Jr., head of the central bank, warned against government efforts to limit the interest rate applied to credit cards at 1% per month (see story). At the time, Tetangco warned that capping the rate might result in price distortion and other “unintended consequences” in the credit card market.

The Bankers Association of the Philippines also has publicly opposed setting a limit on credit card interest rates, saying doing so could adversely affect several government programs seeking to provide Filipinos with financial services (see story).

Some 4 million Philippines residents hold about 6.5 million credit cards, according to the central bank.

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