BSP to rural banks: Take lead in loan transparency

MANILA, Philippines - The Bangko Sentral ng Pilipinas (BSP) has urged rural banks to take the lead in complying with the tighter rules on loan transparency to ensure the protection of consumers and promote healthy competition among credit providers.

BSP Governor Amando Tetangco Jr. said in his speech during the induction of the new board of directors of the Rural Bankers Association of the Philippines (RBAP) that the industry should practice integrity and transparency in doing business.

Tetangco said the central bank’s Monetary Board has approved a resolution last July 7 updating the rules implementing the Truth in Lending Act or Republic

Act 3765 passed in 1963 aimed to enhance loan price transparency and improve disclosure practices, thereby ensuring better consumer protection.

The new guidelines, he said, added a new subsection of the Manual of Regulations for Banks concerning the method of computing interest wherein banks now would only be allowed to charge interest based on the outstanding balance of a loan at the beginning of an interest period.

“Its objective is to ensure better consumer protection by enhancing loan price transparency and improving disclosure practices. In particular this circular prescribes a uniform way of computing interest based on the outstanding balance of the loan at the beginning of an interest period,” Tetangco stressed.

This rule effectively prohibits charging “flat” interest rates and other methods that misleadingly feature a markedly lower contractual interest rate than the actual effective annual interest rate (EIR) which is defined in accordance with the Philippine Accounting Standards (PAS) as the rate that exactly discounts estimated future cash flows through the life of the loan to the net amount of loan proceeds.

“This issuance which covers all credit providers whether bank or non-bank institutions effectively prohibits practices like the use of the so called flat interest rates or rates that substantially differ from the effective interest rate,” he said.

Furthermore, all loan-related documents should show repayment schedules as well as marketing materials and presentations should be consistent with the new regulation.

A standard format of disclosure is provided to ascertain that every borrower is provided with information that he or she needs to know about his or her loan in a manner that is simple and easy to understand.

“It is important to keep a public’s trust by making the true cost of their borrowing truly transparent,” Tetangco explained.

Current practices of some credit providers, particularly the use of so-called “flat” interest rates, show contractual rates for loans that substantially differ from the EIR.

The BSP has been receiving complaints about hidden charges and deliberate quoting of lower interest rates with higher up front charges to enhance loan product marketability.

The new transparency rule would take effect on July next year or one year after publication to allow mounting of a comprehensive information campaign and facilitate smooth implementation.