With new rules, BSP to stem rise of toxic assets

MANILA, Philippines—More financially savvy and better-informed consumers will allow the Philippines to dodge its own version of an economic downturn brought on by the rise in the level of toxic loans.

The Bangko Sentral ng Pilipinas (BSP) on Wednesday said there was a well-established link between catastrophic financial crises and excessive risk-taking by banks, pushing loans to consumers who couldn’t afford to pay them back.

Subprime housing loans in the United States mostly triggered the 2008 global financial crisis that sent the entire world economy into a recession, from which it is now only recovering, regulators pointed out.

“Consumer credit was at the core of that crisis,” BSP Deputy Governor Nestor A. Espenilla Jr. said during a press conference. “The root is the way consumers went beyond their limits.”

On Wednesday, the BSP announced the launch of its new Consumer Protection Framework—a set of rules that aims to force banks to be more upfront when pushing loans and other services to their retail clients.

The new rules will also see to the privacy of information concerning bank clients. Apart from protecting consumers, the new rules will help maintain financial stability by minimizing the buildup of toxic assets.

He said the amount of debt held by consumers was expected to rise in the coming years, given rising income levels among the country’s growing and young middle class. The level of household debt in the country, at the equivalent of about 6 percent of gross domestic product, remained well below the regional average, the official explained.

Espenilla said a higher level of consumer loans should be encouraged, in line with the government’s goal of growing the size of the economy. However, this growth should be done in a sustainable manner by discouraging banks from taking excessive risks that could lead to instability.

The new rules will focus on the transparency and disclosure, privacy, financial education, the fair treatment of clients during underwriting, and the establishment of proper complaints resolution mechanisms.

All financial institutions covered by the BSP will be covered by the rules. These include banks, pawnshops, and lending and financing companies.