BSP halves interest charge on loans with unspecified rates

MANILA, Philippines - The Bangko Sentral ng Pilipinas (BSP) has lowered to six from 12 percent the rate financial institutions may charge on loans and other credit obligations with no specific interest rate.

The revision, detailed under Circular No. 799, will affect any type of credit extended by banks and non-bank financial institutions wherein the interest rate is “absent on an express contract” between the borrower and lender.

The order, approved by the Monetary Board, will take effect on Monday, July 1.

According to BSP deputy governor Nestor Espenilla Jr., the “update” on the Manual of Regulations for Banks and Non-Bank Financial Institutions was driven by the “prevailing low interest environment.”

Under the old central bank’s Circular No. 905, the interest rate on such loans is 12 percent.

In contrast, the BSP has maintained record-low policy rates – banks’ benchmark in charging their loans – since October. They were kept at 3.5 percent for overnight borrowing and 5.5 percent for overnight lending.

While most loans offered by financial firms stipulate a specific interest rate, Espenilla said there are certain types of people-to-people transactions which could be covered by the circular.

Another example are “judicial orders,” he said, wherein the court does not specify how much interest could be charged by a bank against a delinquent borrower.

“If there is delay (in payment), then legal interest can be charged,” Espenilla said.

In general though, financial institutions are governed by Republic Act No. 3765 or the Truth in Lending Act, which mandates them to disclose to borrowers all information about their loans, including the interest.