Wednesday, May 01, 2013

On Loan Sharks, Predatory Banks and a Senate Re-election Hopeful

The Cheapest place to get an unsecured loan in the Philippines is through informal lenders described by Senate re-election hopeful Peter Cayetano as Loan Sharks. Working in and around the traditional wet markets their going interest rate is around 20%. How Cayetano would describe the banks is an unanswered question. An unsecured personal loan from a bank will cost you 23 to 25% and if you prefer the plastic route of a credit card expect to pay up to 42%.

 With one of the world’s highest credit card interest rates it should come as no surprise that over 11% of credit card accounts are delinquent. But to make matters worse the banks themselves operate predatory procedures that push their customers, especially the venerable, into this delinquency.

Take the case of Ami, (name changed to protect her privacy) a single mother of two. Ami has an income of 15,000 pesos ($375) a month. A little under the official income eligibility limit but ok’d to help the Bank’s Credit Card mall stall meet their monthly target.  Ami was given a Citi Bank card with a 30,000 peso limit. 

For the first few months everything was fine. Ami was able to meet her minimum payments of 500 pesos a month.  The bank was so pleased that they doubled her credit limit. They didn’t ask Ami if she wanted the increase, they just did it. The increased limit saw her debt to the bank increase slightly but still she was able to meet the minimum payments. A few months later the bank was still so happy with Ami’s conduct they again increased her credit limit, this time to 100,000 pesos. Ami now had over half her annual income to spend in a heartbeat should she so desire. And again the bank didn’t ask her permission.  

Then the inventible happened. In Ami’s case it was college fees for her eldest, but it could just as easily have been a stint in a hospital, a job loss or the effects of typhoon. Her 15,000 a month could stretch only so far and so the credit card started to take a hammering just to make ends meet. Ami was thankful for her plastic respite, but the other shoe was about to fall. Her monthly minimum credit card payment leapt to half her after tax monthly income. Ami was between a rock and a hard place, something had to give and she became a credit card delinquent. 

Ami now faces the prospect of the bank’s attach dogs, a collection agency who will do all in their power to shame her into payment.  Like the bank they know Ami’s circumstances and at their masters call the preferred outcome is a long term commitment from Ami to make the minimal payments; half her income for the next two and a half years with a residual payment from her savings at the end of the term.  A spendthrift Ami may be but she isn’t dumb, she will throw herself upon the mercy of the court to get a repayment schedule she can afford. 

It can be argued that Ami didn’t have to use her credit facility, but likewise it can be argued that a bank’s duty of care to its customers is not to exceed, where known, the customer’s ability to pay. In Ami’s case the bank knew her ability to pay and pushed it to the point of no return.

So Peter Cayetano, should you be re-elected for another term in the Senate perhaps you could introduce legislation that will protect people not only from loan sharks but also predatory banks. If you are unable to convince the banks to reduce their interest rates to match those of the loan sharks which are similar to first world credit card interest rates. Perhaps you may be able protect customers from the banks predatory practice of untenable credit limits.  It’s simple really “A credit limit cannot be increased without the written consent of all parties, if it is increased, which only the lender can authorize, it becomes the lenders liability”.