Exec: The interest rate cap will only fuel economy “5-6”


A proposal to cap interest rates and other fees charged by loan and finance companies may be ‘counterproductive’ and will only push more lenders into the underground economy, says EU chief Bank of the Philippines.

“I agree that high interest rates are a bad thing, but we have to get through this period of transition. Let the market decide. If you cap you will forever kill the prospects of a market looking for an acceptable domain, ”Union Bank chairman Edwin Bautista said in an interview with Inquirer.

Concerned about “predatory” lending practices, Securities and Exchange Commission (SEC) Chairman Emilio Aquino previously asked Bangko Sentral ng Pilipinas to prescribe maximum interest rates, fees and other charges that Loan companies and finance companies can tax on consumer and payday loans. The SEC chief said some of these entities charge up to 2.5% interest rate per day on top of other fees and charges.

Even if interest rates were capped, borrowers served by these online lenders – whether consumers or micro, small and medium-sized enterprises (MSMEs) – would still not be able to access financing from traditional lenders. Bautista said.

He acknowledged that the market was currently inefficient and lacked transparency.

But the emergence of fintech lenders, Bautista said, has offered alternative options to consumers and MSMEs who have no recourse but to borrow from informal lenders, known locally as 5-6 (they borrow P5, then repay P6, usually within a week).

With more players competing in the market, Bautista said interest rates would naturally drop to a level low enough to benefit more borrowers but profitable enough for the most efficient operator.

“If you cap it down totally, they won’t even develop the algorithms and the process to get to that point, so what will happen is they’ll go away and you’ll go back to 5-6. [schemes],” he said.

Bautista said peer-to-peer lending could eventually emerge, something even more difficult to regulate.

Peer-to-peer (P2P) loans allow individuals to avail loans directly from other individuals using an online marketplace, thereby eliminating the need for banks and other traditional financial intermediaries.

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