PH told to consider cap on bank lending to consumers
Philippine regulators may want to consider setting sector-specific loan limits for consumer borrowers, regional surveillance group Amro said, a proposal aimed at mitigating risks of household over-indebtedness as credit card lending continues to surge in the country.
In a report following its annual consultation visit to the Philippines, the Asean+3 Macroeconomic Research Office said caps on banks’ exposure to the high-yielding but riskier retail segment could be one of the policy tools that may serve as additional safeguards should financial strains emerge.
Amro said regulators could also explore capping fees and borrowing costs. Those steps, it added, may be paired with improvements to the country’s statistical infrastructure to more accurately gauge the repayment capacity of retail borrowers across both formal and informal lending channels.
“To mitigate risks of household over-indebtedness, authorities may consider operationalizing tools such as a debt-service ratio limit, and applying sectoral loan limits to consumer loans,” Amro said.
“If continued expansion in credit card loans is primarily driven by banks’ excessive objective for profits, it may also be worth considering measures such as a lower interest rate and fee cap or tiered pricing frameworks,” it added.
Retail loans
Latest data from the Bangko Sentral ng Pilipinas (BSP) showed retail loans surged by 23.5 percent to P1.82 trillion in September, accounting for 13 percent of the total, with credit card receivables rising by nearly 30 percent to P1.09 trillion.
Such a growth happened amid the ongoing easing cycle of the BSP. Since August last year, the central bank has cut the key rate that banks use as a guide when pricing loans by 175 basis points to 4.75 percent, with Governor Eli Remolona Jr. hinting at further reductions to shore up economic growth.
That said, analysts believe that banks are facing twin pressures at the moment: protecting margins in a low-rate environment while managing credit risks as they increase their exposure to higher yielding—but largely untested—consumer segment.
In its report, Amro said greater financial inclusion could also explain the rise in consumer loans, adding that banks should continue to strive to offer affordable products that support their customers’ financial well-being while enhancing credit risk management, particularly in light of increases in credit costs.
Looking ahead, Amro said the surge in consumer lending would unlikely undermine the soundness of the Philippine banking system. But it warned that the rapid expansion of credit cards and salary loans warrants tighter monitoring, as these products have grown faster than other collateralized loans, such as motor vehicle and residential real estate loans.
“Given their unsecured nature, this rapid expansion warrants closer monitoring in light of borrowers’ employment stability and repayment capacity to limit over-indebtedness,” they said.
“In the context of the Philippine economy, excessive expansion of consumer credit amid intensifying competition among banks in the consumer loan market could lead to a relaxation of lending standards or a concentration of credit in certain vulnerable groups, both of which could elevate financial stability risks,” it added.
