RBAP-MABS Prepares Rural Banks for the New Effective Interest Rate Calculation Rules

The first of a series of seminar workshops to prepare banks for the new rules on effective interest rate calculations was held at the Bangko Sentral ng Pilipinas (BSP) Complex at Pasay City last March 8, 2012 to discuss the new regulations and what banks must prepare for. Attended by participants from fifteen (15) rural banks, the workshop was conducted by the United States Agency for International Development-supported Rural Bankers Association of the Philippines-Microenterprise Access to Banking Services (RBAP-MABS) Program, together with the Rural Bankers Research and Development Foundation, Inc. (RBRDFI). Representatives from the BSP were on hand to answer questions from the participants.

At the seminar participants learned about how effective interest rates (EIR) are calculated based on BSP Circular 730 and BSP Memorandum M-2011-040. The circular, entitled “Updated Rules in Implementing the Truth in Lending Act to Enhance Loan Transaction Transparency”, aims to disclose the effective interest rate (EIR) to clients and mandate the shift of interest rate calculations based on flat rates to those based on declining balances. The circular takes effect on July 1, 2012.

Strategies on mitigating the impact on bank profits were discussed, while exercises helped draw out practical approaches in rolling-out these rules within banks. Marketing, communication, and information system issues were included so that these efforts are aligned with the objectives of the circular.

Foremost in the minds of bank participants were issues on the impact of pricing transparency to their bank and its borrowers, concerns on reduction in bank income, and how to explain EIR to clients. The workshop clarified that banks may charge the same nominal rates as they currently do, but they will have to quote the effective interest rate on all loans rather than the nominal rate. On the other hand, these rules would allow clients to compare effective interest rates from different banks. This will help efficient banks to better promote attractive interest rates to their clients and better compete with other players. It was also noted by the BSP that, under the law, all lenders must comply with the new effective interest rate guidelines or face the penalties for violating the Truth in Lending Act. This applies to all banks, pawnshops, lending investors, credit cooperatives, NGO Microfinance Institutions, and even money lenders.

It was noted during the question and answer session that the new circular is applicable to new loans, renewals, and loans for restructuring issued on or after July 1, 2012. Participants also engaged in group work to try their hands at crafting tools for effective communication of the new interest rate policy to their clients including sample posters, product flyers, and rate sheets. The workshop emphasized that by formulating various strategies to understand and implement the regulations, rural banks would be able to demonstrate their ongoing commitment to being better partners in countryside development while providing the highest levels of transparency to their clients and customers.