BSP bans flat rates on loans
By Prinz P. Magtulis (The Philippine Star) Updated July 03, 2012
MANILA, Philippines - Banks and other lending institutions are no longer
allowed to offer flat interest rates on loans as the Bangko Sentral ng
Pilipinas (BSP) implements circulars updating rules of a 1963 law that
enforces transparency in credit lending.
BSP Deputy Governor Nestor Espenilla said yesterday the new circulars
want to establish discipline and responsibility among credit granting
institutions.
"Interest should be based on outstanding balance of a loan. In reality
however, what we have observed is that interest rates are charged to
initial balances, even if it has declined," Espenilla said.
"Flat rates are no longer allowed since they tend to confuse the
public," he added.
A flat rate is when lenders charge a fix interest rate to a particular
loan within a certain maturity. Espenilla said this tend to be
"appealing" to borrowers, especially since they are "easy and seems to
be more understandable" than a declining interest rate.
A declining rate, he explained, is when the interest is based on the
balance of the loan plus all the fees and charges computed every paying
period. In this way, Espenilla said a lender is being transparent as to
the true cost of the loan.
"But the loan is not necessarily more expensive. You are just being
transparent," Espenilla explained.
He cited a case when a borrower of P10,000, with a term of 13 weeks, was
charged with 1.5 percent flat monthly interest rate plus a separate
three percent rate as "other charges." The P803.85 weekly amortization
will be the same for a P10,000 loan with a term of 13 weeks and has a
declining interest rate of 4.77 percent.
In the second instance, "the total cost of the loan involved the
interest, fees, service charges, discounts, and all others incident to
the extension of credit," Espenilla said, noting that fees and charges
are part of the "mandatory disclosures" provided under the BSP Circular 755.
"The challenge here is really the enforcement. We made a comprehensive
effort in drafting these rules and now our efforts will shift to making
sure that these regulations will stick toward enforcements," Espenilla said.
Lending institutions that will be found not following the new rules will
be sanctioned accordingly, he added.
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