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New finance charge cap could cause lenders to tighten credit standards

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BANKS MAY BE more “selective” in granting credit card applications to compensate for compressed margins as a result of the finance charge limit set by the Bangko Sentral ng Pilipinas (BSP), said Alex G. Ilagan, executive director of the Credit Card Association of the Philippines.

“[I]n the long run, it will also be detrimental to the consumers in several ways…. One, because when the margins are being compressed, naturally banks will be more selective in the issuance of credit cards,” Mr. Ilagan said in an interview with ABS-CBN News Channel on Monday.

These tighter standards could result in banks denying credit to the “riskier segment of the market” or lower income groups, he said.

“People who used to be qualified will no longer be qualified to get a credit card because of the cap,” he said.

The new interest limit could also reduce credit card perks that consumers have been enjoying, Mr. Ilagan said.

“The banks will try to cut down on their added costs — the freebies, the reward points, the rebates. These are the unintended consequences that will happen,” he said.

The central bank last week approved the 24% annual interest rate cap for credit card transactions which will take effect on Nov. 3 and will be reviewed every six months. This translates to applicable rates of up to two percent monthly for unpaid outstanding credit card balances.

Meanwhile, the ceiling for monthly add-on rates for credit card installment loans was placed at one percent.

The BSP said the move is part of its efforts to ease the financial burden of consumers and small businesses amid the coronavirus pandemic.

BSP Director for Supervisory Policy and Research Department Veronica B. Bayangos has said the average annualized rate for credit card receivables ranged from 18% to 58% from January to June.

However, Mr. Ilagan yesterday said credit card issuers only get an 18% real average yield for credit card receivables, as clients who pay their card balances in full every month do not pay interest.

“So the interest is only earned from the revolvers. These are the people that don’t pay their balances every month,” he said.

“Aside from that, the credit card portfolio is also a mixture of revolving balances and installment loans. Installment loans typically have lower interests on average. 1.5%,” he added. — LWTN

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