December 14, 2020 | 5:09 p.m.
Manila, Philippines (UPDATE 1 5:42 PM, Dec 14) — The proportion of credit card holders unable to pay their bills on time is on the rise as the holiday season approaches, when consumers are expected to spend more and use their card more often.
The chargeback rate, represented by unpaid credit card charges on the total bill, jumped to 11.5% in September from 4.36% at the end of 2019, the Credit Card Association of the Philippines said ( CCAP) in a press release.
The number was also up from the 10.5% recorded in August, the data showed.
Credit card delinquency occurs when a cardholder has a poor payment history and frequently pays bills well overdue. The credit limit of defaulting borrowers is also often maxed out, which can be a sign of tight incomes.
Alex Ilagan, president of the industry group, said unpaid credit card bills were expected, especially with the growing number of unemployed. “This was primarily caused by the loss of income and unforeseen large expenses, as well as the lockdowns which resulted in travel restrictions and difficulties in making payments on time,” he said in a statement.
As the jobless rate fell to 8.5% in October from a record high of 17.5% in July, the central bank itself expected defaulting bank loans to rise slowly just as periods Thanksgiving is over and the damage of the pandemic in the form of closed businesses becomes more evident. The broader non-performing loan ratio across all banks rose to 3.69% in October.
The problem can only get worse. Chuchi Fonacier, the central bank’s deputy governor, said last month that lending could increase as the credit card fee cap of 2% a year is enforced in November. CCAP said the limit could trigger more financial problems for its members, but Fonacier countered that card penalties are not fully lifted and should therefore maintain some cash flow to banks.
More broadly, the Bangko Sentral ng Pilipinas (BSP) last Friday opened up more opportunities for banks to lend by putting another cap, this time on loans that can be extended to businesses that qualify as an alternative to meeting reserves. mandatory.
Under the new rule, lenders can only qualify as reserve loans for up to 300 billion pesos in loans to micro, small and medium enterprises and 425 billion pesos to large companies. These loans inevitably include credit card receivables. “Ultimately, a credit card can be a reliable and convenient payment tool and a readily available line of credit in an emergency,” CCAP said.
At first glance, the limits seem misplaced since banks are far from reaching the limits as of November 12, when they granted 123.6 billion pesos to loans to MSMEs and 29.5 billion pesos to large companies.
BSP Governor Benjamin Diokno said the limits are not put in place to protect banks’ balance sheets by limiting their chance to take risks. “The idea is to encourage competition between banks to lend to MSMEs and large companies as needed,” he said in a Viber message last Friday.
“We want to signal to banks that this monetary accommodation is not unlimited,” he added.
On the consumer side, Ilagan said it’s in their interest that they raise their bills on time. “Some large companies check the credit history of their applicants. In some banks, poor credit behavior can also affect possible promotion to higher positions,” he said.
“In the future, other non-financial institutions that provide lines of credit for the use of their services, such as a post-paid mobile phone connection, may also begin to access credit history before providing service to a new customer,” he added.
Editor’s Note: Modified to reflect the correct delinquency rate for the year 2019.