Regulator issues clearer rules on bank financing

MANILA, Philippines—The Bangko Sentral ng Pilipinas has issued new rules on transparency in the lending activities by banks, citing the need to protect the public against hidden charges placed by some creditors.

Monetary Board Resolution 1018 will take effect in July next year. Under the new rules, banks are prevented from imposing hidden charges on loans and charging misleading interest rates.

For instance, the new rules will require banks to cite the effective interest rate (EIR) on a loan and to charge interest on the outstanding balance of a loan only at the beginning of the interest period.

Under the new rules, banks will also have to disclose to borrowers clear definitions of the terms “interest,” “fees,” “service charges,” and “discounts,” among others.

Moreover, the new rules also provide a standard format for loan cost disclosure that banks must give to their clients.

In a statement, the BSP said it was forced to issue the new rules after it received complaints that some banks had been charging borrowing costs that were higher than what the borrowers understood.

“Current practices of some credit providers, particularly the use of flat interest rates, show contractual rates for loans that substantially differ from the EIR,” the BSP said.

According to the regulator, there have been reports that some banks have been imposing hidden fees and charges, quoting low interest rate but imposing high upfront payments, effectively misleading the borrowers.

“As a result, the public may be misinformed or misguided about the true cost of their borrowings,” the central bank said.

The new rules will take effect a year from now to give ample time for banks to make adjustments to their loan practices and to ensure that the rules are disseminated to all institutions.

The BSP said that the new measures would only cover banks, but an additional set of rules on transparency will also be prepared to cover nonbank financial institutions, savings and loan associations, and other institutions engaged in lending.

The BSP said it would coordinate with other concerned regulators, including the Securities and Exchange Commission, Insurance Commission, and the Cooperative Development Authority so that they would be able to issue their own sets of rules complementing those of the BSP.—Michelle V. Remo