Philippine thrift banks seek limits on extended salary loan terms

MANILA, Philippines – Philippine thrift banks support the Bangko Sentral ng Pilipinas’ (BSP) decision to allow salary loans with repayment periods of up to seven years but want the longest terms limited to certain expenses to prevent borrowers from accumulating overlapping debts. Manuel Santiago Jr., a trustee of the Chamber of Thrift Banks, said six- and seven-year terms should not automatically be available for all salary loans, particularly those used for recurring expenses. “In regards to the new circular extending the seven years, the thrift bank industry is in full support. However, the main concern that is being worked on right now is that we want to avoid overburdening the borrowers. And we are very careful in making sure that the teachers or the salary loan people are not overburdened,” he said at the sidelines of the Chamber of Thrift Banks annual convention. “Where tuition is really a one-year thing and you’re going to need tuition every year, you cannot do seven years of tuition fee, right?” Santiago told reporters on Wednesday, July 15. Santiago, who is also the president and chief executive of CitySavings, cautioned that thrift banks had to balance “the purpose of where the six- and seven-year loans are going to be applied.” “Our position is that it shouldn’t be for all,” he added. Salary-based general-purpose consumption loans are unsecured loans granted largely on the strength of a borrower’s regular salary, pension, or other fixed compensation. Unlike a housing or car loan, they are not backed by a specific property that the lender can seize if the borrower fails to pay. The chamber is considering recommending that longer loan terms be reserved for emergency situations, such as hospitalization, and major non-recurring expenses, such as home repairs. Spreading a loan over more years can reduce the amount deducted from a borrower’s salary every month, but it can also keep the borrower in debt for longer and potentially raise the total interest paid. This can hurt banks as well because if borrowers become overextended and fall behind on payments, the loans can turn nonperforming, weakening banks’ asset quality and forcing them to set aside more provisions for potential losses. Santiago said salary loans may comprise around 30% of the portfolios of thrift banks with several consumer products, but can reach 70% to 80% among lenders that specialize in salary-based financing. BSP Deputy Governor Lyn Javier said about 70% of thrift-bank loans are extended to individuals, while around 24% go to businesses. Salary loans account for more than half of the sector’s individual-loan portfolio. What the new BSP rule says Under BSP Circular No. 1239, issued on June 18, the maximum repayment period for salary-based consumption loans was extended to seven years. “The BSP recently removed the five-year limit on salary loans and extended it to seven years, depending on assessment of the capability of the borrower to repay the obligation. And this is to provide greater flexibility and allow banks to better restructure repayment based on the borrower’s circumstances,” Javier said during the convention. The seven years is a ceiling, not an automatic or required loan term. Banks may still determine how long a borrower should be given to pay based on the person’s income, capacity to pay, repayment sources, employment and credit history, and the nature and purpose of the loan. The rule applies to salary loans used for expenses, including education, meaning tuition is not prohibited. However, lenders retain the discretion to approve a shorter term. Javier said extending the maximum term was intended to give borrowers and banks more flexibility, including when restructuring loans. But she urged lenders to look beyond simply extending credit. “The next challenge is to help the borrowers improve their financial well-being over the long term. Ang tunay na malasakit ay hindi nagtatapos sa pagpapautang (True compassion doesn’t end with lending). Banks or the industry should also support in providing financial wellness programs, livelihood opportunities, securing their retirement — and, shameless plug — yes, promoting PERA,” the deputy governor said. PERA, which stands for Personal Equity and Retirement Account, is a voluntary retirement savings program that lets Filipinos invest in certain financial products, such as money market, bond, and equity funds, while enjoying tax incentives. Contributors can claim a 5% tax credit on annual contributions, while investment income earned by the funds and retirement withdrawals from those investments are tax-free. – Rappler.com