Dangerous move

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The Securities and Exchange Commission (SEC) recently issued a draft memorandum circular that will limit to no more than 10 percent per month the effective interest rate on unsecured, general-purpose loans offered by financing companies (FC), lending companies (LC) and their online lending platforms (OLP) with amounts not exceeding P20,000 and tenors of not more than six months.

This will apply to loans entered into, restructured or renewed beginning Dec. 1 of this year.

According to the draft circular, the 10 percent effective interest rate ceiling per month includes the nominal interest rate ceiling of six percent per month as well as other applicable fees and charges such as processing fees, service fees, documentary stamp tax, but excludes fees and penalties for late payment and non-payment for which the SEC plans to impose a separate cap of five percent per month on the outstanding scheduled amount due.

A total cost cap of 100 percent of the total amount borrowed, which will apply to all interest, other fees and charges and penalties, regardless of the time the loan has been outstanding, will also be imposed.

Failure to comply will subject the FC and LC to fines of P50,000 and P25,000 for first offense, respectively, to P100,000 and P50,000 for second offense, and a fine of as much as P1 million and suspension of financing and lending activities as well as suspension or revocation of the company’s primary registration.

The SEC is the government agency that regulates and supervises FCs and LCs.

It cited the Financial Products and Services Consumer Protection Act which gave the SEC the authority to determine the reasonableness of the interest, charges or fees which a financial service provider may demand, collect or receive for any service or product offered to a financial consumer.

According to the SEC, it was necessary to recalibrate the imposed ceiling on interest rates to ensure that financial consumers are adequately protected from unconscionable interest rates and predatory lending practices.

SEC chairman Francis Lim noted the increasing number of borrowers who are struggling under excessive interest rates, with certain entities exploiting the accessibility of online lending applications to trap Filipinos into cycles of debt.

There is already an existing policy that imposes a nominal interest rate of six percent a month and an ef fective interest rate of 15 percent per month but only on short-term, unsecured and general-purpose loans offered by LCs, FCs and their OLPs not exceeding P10,000 that are payable up to four months. The ceiling on penalties for late or non-payment is the same at five percent per month as well as the total cost cap which is 100 percent of the total amount borrowed.

The intent to protect micro loans borrowers is both important and understandable. But the challenge lies in coming up with policies that do not inadvertently hurt the very people they aim to safeguard.

For years, micro-loan providers which include financing companies and digital lenders as well as fintech-enabled credit platforms, have served millions of Filipinos who cannot access traditional bank loans.

These are the same companies that pay taxes, comply with regulations, invest in technology and cybersecurity and operate under stringent reporting requirements. They perform functions that should have been part of a more robust public financial safety net.

The head of an online lending platform recently warned that lowering interest rates for small loans could have a reverse effect and persuade borrowers to instead go to illegal lenders.

JuanHand CEO Francisco Mauricio told one media outfit that the move may backfire and lead vulnerable borrowers to loan sharks. Tighter enforcement, not a lower cap, will protect consumers, he said.

Mauricio argued that even a one-percentage-point reduction would force compliant lenders like JuanHand to reject as many as 300,000 loan applications monthly or about 3.6 million annually, forcing the borrowers to turn to unregistered and predatory lenders.

He also heads the Consumer Lending Association of the Philippines, which will propose to the SEC instead that an additional product, like loans of up to P20,000 payable in four to six months, be subject to the 10 percent monthly effective interest rate ceiling.

Mauricio explained that this option would give borrowers more choices without disrupting risk models that enable compliant fintech companies to serve high volume, small-ticket loan demand.

Meanwhile, a group of consumer advocates has also urged the SEC to reconsider its proposed interest rate cap for small, unsecured loans of up to P10,000, warning that this might cause legitimate lenders to withdraw or scale down their services.

CitizenWatch Philippines lead convenor Orlando Oxales noted that this proposed new move strikes at the core of the small credit system that millions of Filipino families rely on every single day, adding that if the SEC pushes through with this cap, it will choke an accessible formal lending channel available to ordinary consumers.

Underground lenders, he said, charge interest rates of as high as 20 percent per week, not to mention the daily collection pressure, verbal intimidation and public shaming that they subject borrowers to when they fall behind in payments.

Oxales emphasized that while consumer protection is needed, it must be done in a way that keeps formal credit available to those who need it most — by targeting abusive and unregistered lenders, not by weakening legitimate providers who follow the rules.

Microloans are fundamentally different from larger, lower-risk loans. They involve higher default risk, intensive fraud controls, identity verification costs and more complex operational safeguards. A cap that does not take these realities into account could make microlending unviable for responsible players.

The policy must instead focus on strengthening enforcement against loan sharks, reducing barriers to formal credit and creating an environment where responsible lenders can continue to serve the people who depend on them.

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