BSP circular doesn’t give lenders freedom to raise interest rates

MANILA, Philippines—The Circular issued by the Bangko Sentral ng Pilipinas (BSP) that effectively removed the ceiling on interest rates does not give lenders the freedom to raise interest rates to the point of haemorrhaging borrowers, the Supreme Court clarified.

In its decision promulgated Jan. 15 but made public Wednesday, the high court dismissed the petition filed by Eduardo Olaguer and the Advocate for Truth in Lending Inc. (AFTIL).

The high court, through Associate Justice Bienvenido Reyes, said even if borrowers and lenders agree on excessive interest rates on debt, it is still not allowed for being immoral and unjust.

Petitioners argued that CB Circular 905 was promulgated without the benefit of public hearing and violated Article 5 of the New Civil Code which states that “acts executed against the provisions of mandatory or prohibitory laws shall be void except when the law itself authorizes their validity.”

They said with the issuance of the Circular, the benchmark 91-day Treasury bills (T-Bills) shot up to 40 percent per annum while banks re-priced their loan rates higher than the T-bills.

But the high court, in its ruling said “stipulations authorizing iniquitous or unconscionable interests have been invariably struck down for being contrary to morals, if not against the law.”

The high court pointed out that under Article 1409 of the Civil Code such contracts are considered inexistent and “void ab initio” (void from the beginning) and therefore cannot be ratified nor may the right to set up their illegality as a defense be waived.

Still, the high court said, if interest rates are excessive, lenders are still protected because it will not affect the other terms of the credit.

“The debt due is considered as without the stipulated excessive interest and a legal interest of 12 percent per annum will be added in place of the excessive interest formerly imposed,” the high court said.