Vulnerability is often associated with poverty. Faced with limited resources and opportunities, people from low-income groups usually find themselves in a situation where they have to take out small loans. This was especially true during the first wave of the pandemic which left a lot of people unemployed and struggling to make ends meet.

Taking out such loans, however, comes at a price. According to the Securities and Exchange Commission, several lending and financing companies have imposed exorbitant interest rates, fees, and charges on their unsecured, short-term, small-value, and high-cost consumer credit, causing Filipinos to fall into debt traps. This, and the seeming inconvenience of taking out loans from lending and financing companies which involve the observance of standard operating procedure and documentation notwithstanding how small the loan amount is, constrain low-income borrowers as well as the unbanked and underserved segment of the population to loan from individuals engaged in lending activities. Needless to say, some of these individual lenders also tend to take advantage of their borrowers and charge exorbitant excessive rates and charges.

In order to address these abusive and predatory lending practices, the Bangko Sentral ng Pilipinas issued Circular 1133, Series of 2021, which prescribes the ceilings for interest rates and fees charged by financing companies, lending companies, and their respective online lending platforms. The circular was issued pursuant to Section 7 of Republic Act 9474 or the Lending Company Regulation Act of 2007 and Section 5 or Republic Act 8556 or the Financing Company Act of 1998 which empower BSP Monetary Board to prescribe maximum interest rates that could be charged by lending and financing companies, in consultation with the SEC and the industry, if warranted by prevailing economic and social conditions.

BSP Circular 1133 is limited in application and covers only short-term, small-value, and high-cost consumer credit targeting primarily low-income borrowers. Such pertain to unsecured, general-purpose loans offered by lending and financing companies that do not exceed the amount of P10,000 and with a loan tenor of up to four months, whether obtained through online or traditional/offline distribution channels.

Under the circular, the BSP Monetary Board prescribed a maximum nominal interest rate of 6 percent per month, or about 0.2 percent per day, and an effective interest rate ceiling of 15 percent per month, or about 0.5 percent per day. Nominal interest rate refers to the contractual rate or the price paid for the use of money and is expressed as a percentage of the total amount borrowed without considering other fees and charges. Meanwhile, the effective interest rate refers to the nominal interest rate along with all other applicable fees and charges (i.e., processing fees, service fees, notarial fees, handling fees and verification fees, among others), but excluding fees and penalties for late payment or non-payment.

In the same circular, a cap on penalties for late payment or non-payment at 5 percent per month on outstanding scheduled amount due was also fixed. Furthermore, it imposed a total cost cap of 100 percent of the total amount borrowed (applying to all interest, other fees and charges, and penalties) regardless of the time the loan has been outstanding. The ceiling rates are subject to a periodic review by BSP, in consultation with the SEC and the industry.

To implement and monitor compliance with BSP Circular 1133, the SEC issued Memorandum Circular 03, Series of 2022, on 1 March 2022. Section 4 thereof requires all financing and lending companies to submit an annual Impact Evaluation Report beginning 2023 and a business plan indicating the company's loan products and services as well as the applicable pricing parameters.

While there have been no known and published reports yet on the non-compliance with BSP Circular 1133 and Memorandum Circular 03-2022, the issuance of such circulars by BSP and SEC definitely paves the way for safer and fair dealings between the borrower and the financing or lending companies — by providing protection to borrowers against predatory lending and ensuring their continued access to credit while still maintaining the viability of the business operations of the financing and lending companies.

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