Consumers brace for high loan rates

Lisa Torres, a single mother, bought an apartment on Commonwealth Avenue, Quezon City, in mid-2017 with a bank loan that had a yearly interest rate of 6 percent.

Torres intended to rent out the apartment to offset its cost, but it had remained unoccupied.

Three months before the loan turned one year in July, she was surprised to receive a notice from her bank that it was raising the yearly interest to 8.83 percent.

Her monthly amortization surged from a little over P23,000 to P28,000 a month.

Without a tenant to make the apartment pay for itself, her property investment has become a financial burden instead.

“The bank said that’s their rate, so there was nothing I can do. I didn’t have time to transfer the loan to another bank because I got the notice three months before due date,” Torres said.

She knew from the start that the terms of the loan would be renewed every year, but she never thought that the increase would be this steep.

Another bank is willing to lend at 7 percent, but Torres said she didn’t have time to process the papers.

As such, Torres intends to prepare early for her loan repricing next year, worried that interest rates would rise further.

Wacky Villanueva, a life coach, was planning to buy two brand-new vans to add to his fleet at a car rental company, Lakbay Services Inc.

But Villanueva found the interest rates charged by banks quite high and the requirements so cumbersome.

To save money for more capital, he bought slightly used vans by assuming the loans contracted by the owners who could no longer continue servicing their debt.

For Villanueva, buying the secondhand vehicles is a way of coping with rising inflation and interest rates.

“It’s a flourishing business for those who broker deals for distressed assets. We have several units that we took over from the original borrowers, especially vans and [compact sedan] Vios,” he said.

Since March this year, average consumer prices have risen at a much faster pace than expected, overshooting the 2-4 percent target of the Bangko Sentral ng Pilipinas (BSP).

The implementation of the first phase of the Tax Reform for Acceleration and Inclusion (TRAIN) Act is partly to blame, as it raised excise on fuel, motor vehicles and sweetened beverages, among other goods.

The TRAIN law also coincided with the upswing in global oil prices and the surge in rice prices as the National Food Authority failed to ensure an adequate reserve.

9-year high

In August, inflation surged to a nine-year high of 6.4 percent, bringing the eight-month average to 4.8 percent.

The BSP has tried to hold off interest rate hikes as long as it can, knowing that monetary tightening can curb economic growth by making it more expensive for businesses to expand or for consumers to buy their basic needs.

But with the peso sharply weakening against the US dollar—the exchange rate has hit 54:$1—and inflation expectations rising further, especially with crop damage caused by Typhoon “Ompong” (international name: Mangkhut), the BSP is on its most hawkish mood in nearly two decades.

The BSP has raised its key interest rates by a total of 150 basis points so far this year.

In the last two consecutive raisings, it jacked up interest rates by a hefty 50 basis points each, bringing its overnight borrowing rate to 4.5 percent.

The BSP actions have prompted banks and other lending companies to raise their loan rates to consumers.

“Overall, we continue to see risks that the BSP will hike again this year given its clear hawkish signals and its forecast that inflation could remain above target again next year,” Nomura economist Euben Paracuelles said in a commentary on Sept. 27, when the BSP authorized the latest 50-basis-point rate hike.

The banks are preparing for greater challenges. With the volatility in global finance, trading gains have shrunk, reducing the banks’ returns while their capital requirements and compliance costs have ballooned.

Manageable

But the recent increase in local interest rates is seen as manageable.

“We believe corporates and even consumers can handle the rate increase. While rates have increased, they are still below the rates during the previous crises when the government rates exceeded 12 percent,” BDO Capital & Investment Corp. president Eduardo Francisco said.

According to World Bank data, lending rates in the Philippines averaged 28.6 percent in 1985 or the year before the Edsa People Power Revolution that toppled the Marcos dictatorship.

Since 2006, the average lending rate has gone down to single-digit levels, settling at 5-percent levels from 2012 to 2017.

Francisco estimated that Philippine banks were now quoting 8-10 percent interest rate for one-year consumer loans, such as housing and car loans.

This range, he noted, is still much lower than the 18-20 percent yearly average lending rate to households during the Asian currency crisis of 1997.

Commercial borrowers

For corporate or commercial borrowers, Francisco estimated the prevailing rates of 6-8 percent yearly compared with 14-16 percent during the crisis.

The Asian currency crisis refers to the time when Asian currencies were devalued, resulting in a wave of corporate defaults as many borrowed in foreign currency.

Most banks have not adjusted their credit card lending rates, as these are already high at 2.5 percent to 3.5 percent a month.

“We are stress-testing our portfolio and will be monitoring delinquencies, but we believe borrowers can still support the rates because their businesses should also remain robust,” Francisco said.