Banks vow more loan transparency

MANILA, Philippines - Banks operating in the Philippines vowed to cooperate with the Bangko Sentral ng Pilipinas (BSP) by complying with the tigther rules on loan transparency to ensure the protection of consumers and promote healthy competition among credit providers.

Bankers Association of the Philippines president Aurelio Montinola II said in an interview with reporters that the country’s banking industry is already practicing integrity and transparency in doing business with their clients.

“I think that’s been happening already in many ways. The only thing that has to be changed, which is fairly easy, is to change the communication,” Montinola stressed.

The BSP has approved MB Resolution 1018 last July 7 updating the rules implementing the Truth in Lending Act or RA 3765 passed in 1963 aimed to enhance loan price transparency and improve disclosure practices thereby ensuring better consumer protection.

The new guidelines under Circular No. 730 series of 2011 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.

“Because what’s happening there, the people know that the interest rates are always based on the remaining principal. That’s been the industry practice for the longest time,” he added.

Montinola, who is also president of Ayala-controlled Bank of the Philippine Islands (BPI), said banks would just have to improve their communications with their clients.

The new rules 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. 

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.

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.

The BSP said the implementation of the new regulation is very timely as calls for enhanced consumer protection is intensifying specifically as affirmative financial inclusion policies lead to availability of an ever widening range of financial products and services.