Interest rate cap could force credit card firms to close shop, says BAP

MANILA, Philippines - Banks and other credit card issuers warned congressmen yesterday that a cap on interest rates could force them to close their credit card business.

In position papers they submitted to the House committee on banks and financial intermediaries, the Bankers Association of the Philippines (BAP) and the Credit Card Association of the Philippines (CCAP) opposed bills seeking a ceiling on lending rates that credit card issuers could charge their customers.

According to the Bangko Sentral ng Pilipinas (BSP), there are about four million Filipinos using credit cards.

BAP president Aurelio R. Montinola III said although they recognize the laudable intention of the bills, in the ultimate analysis, an interest rate cap would harm consumers and could cause credit card companies to cease operations.

He said limiting lending rates results in “lower credit extension,” which is disadvantageous to consumers, many of whom would be forced to turn to the so-called “5-6” usurers, who charge at least 20 percent a month or 240 percent a year.

“Take the case of Japan where consumer lending dropped since companies can no longer take on higher risks thus lower income level individuals and families were deprived of credit extension. If the companies cannot compensate for the risks, then it is not prudent to extend credit,” he said.

“Given the proposed cap on interest rates, credit card businesses may be compelled to close operations...more of credit card holders will transfer or return to borrowing from informal sectors, which means exceedingly higher interest rates for customers and lesser taxes for the government,” Montinola stressed.

Simon Calasanz, CAAP president, expressed similar concerns.

“A credit card company is first and foremost a business. As such, it has to make a significant investment on infrastructure, systems, manpower, and the like before it can realize a profit,” he said.

“Capping the interest rate and the fees charged by these companies will, at best, effectively lengthen the time it will take for the company to recover and finance required new technology and infrastructure; at worst, capping interest rates will make the investment unrecoverable. This situation will eventually lead the credit card company to cease their operations and close shop,” he said.

“It takes years before a credit card company recovers its investments through the interest rates that it places on the credit card,” he said.

He added that credit card companies contribute a significant amount in tax revenue to the government as transactions are easily legitimized, with the merchant compelled to issue a receipt on card purchases.

Calasanz pointed out that bills seeking an interest rate cap “will adversely impact the very consumers they are protecting.”

They will no longer have access to formal and regulated credit lenders and will be forced to turn to the black market like loan sharks, he said.

“Consumers who use cards for convenience like international spending, zero interest installment plans, and online transactions will be deprived of these facilities and benefits. Should card companies cease to grant credit, the 30 to 35 percent of consumer spending in retail outlets is automatically put in jeopardy,” he said.

CCAP predicted in its position paper that there would be an economic slowdown if there would be a decline in consumer lending.

Like banks and credit card companies, the BSP has opposed proposals to set an interest rate ceiling for credit card leading.

The BSP said it prefers rates to be dictated by market conditions like competition among card issuers.

It said the rates issuers charge their customers are not high.