Exec: Capping interest rates will only feed ‘5-6’ economy

A proposal to cap interest rates and other fees charged by lending and financing companies may be “counter-productive” and will only drive more lenders into the underground economy, according to the chief of Union Bank of the Philippines.

“I agree that high interest rates are a bad thing but we need to go through this transition period. Let the market decide. If you do cap it, you will forever kill the prospects of a market seeking a field that is acceptable,” Union Bank president Edwin Bautista said in an interview with Inquirer.

Concerned about “predatory” lending practices, Securities and Exchange Commission (SEC) chair Emilio Aquino earlier asked the Bangko Sentral ng Pilipinas to prescribe the maximum interest rates, fees and other charges that lending companies and financing companies may impose on consumer and payday loans. The SEC chief reported that some of these entities were charging as much as 2.5-percent interest rate per day on top of other fees and charges.

Even if interest rates were capped, the borrowers served by these online lenders—whether consumers or micro, small and medium enterprises (MSMEs)—would still not be able to access funding from the traditional lenders, Bautista said.

He acknowledged the market was currently inefficient and lacking in transparency.

But the emergence of fintech lenders, Bautista said, had given alternative options to consumers and MSMEs who have no other recourse but to borrow from the informal lenders, locally known as 5-6 (they borrow P5, then pay back P6, typically in a week).

With more players competing in the market, Bautista said interest rates would naturally go down to a level low enough to benefit more borrowers but profitable enough to the most efficient operator.

“If you cap it outright, they won’t even develop the algorithms and the process to get to that point, so what will happen is they will disappear and you’re back to 5-6 [schemes],” he said.

Bautista said peer-to-peer lending could eventually emerge—something even more difficult to regulate.

Peer-to-peer (P2P) lending enables individuals to avail of loans directly from other individuals using an online marketplace, eliminating the need for banks and other traditional financial intermediators.