CREBA urges: Restore time-honored role of banking system

Chairman of the Board
Chamber of Real Estate and Builders Association

(Part Two)

The folly of Government’s extremely tolerant posture toward the excesses of the banking system becomes particularly disastrous in the face of the banking practice of: (a) applying any hike in interest rates not just on prospective loans, but also on those already existing or pre-contracted prior to such hike, under the standardized "escalation clause" in loan mortgage agreements; and (b) imposing upon corporate borrowers the requirement for officers/stockholders to execute a "Joint and Solidary Security" (JSS) clause as additional loan security (over and above the standard collateral) in the event of foreclosure of the corporate loan.

These twin practices alone – considering that any sudden totally unforeseeable and unprogrammed rate hike could easily spell failure by the borrowers to meet the regular contracted obligations as they fall due, and any such delinquency would result not just in corporate bankruptcies but personal bankruptcies as well – are not just usurious but downright immoral if not illegal.

The convergence of these situations of indiscriminate misapplication of credit policy on one hand and exploitative banking practices on the other, renders the economy highly vulnerable to collapse, and instantly inflicts incalculable and irreparable harm – particularly on the hundreds of thousands of SMEs that are for most part highly dependent on credit.

Invariably, when this happens everyone suffers. But labor – being entirely dependent upon the business sector for livelihood, and with little if any alternative opportunities – suffers the worst.

With these in mind, and in order to restore the time-honored role of the banking system as an instrument for economic growth, CREBA recommends a package of measures, intended to be undertaken through legislation, on an immediate and intermediate basis, as follows:

Immediate measures:

1. Imposition of a fixed lending rate ceiling of not more than nine percent – inclusive of processing and other front-end fees – which will be uniform for all loans without distinction as to prime or non-prime. This will preclude any abrupt rise in interest rates, even as it would fee the interest rate mechanism from any exploitative influence of both the so-called banking cartel and predatory speculators in the guise of foreign investors. Just as importantly, it will enable borrowers to effectively program business operations particularly in terms of meeting loans obligations, even as it would tremendously boost the local investors’ confidence and faith in the government’s sincerity to accord them due preference consistent with the Constitutional mandate.

2. Simultaneously exemption of bank lending transactions from the following taxes: a) Gross Receipts Tax (GRT); b) Value-Added Tax (VAT); c) Documentary Stamps Tax (DST); d) Tax on interest income. Complemented by sectoral credit allocations – in line with government thrusts – for SMEs and the agriculture, export and housing sectors, this will help ensure that credit is not only assessable but affordable as well.

3. Legislated increase of P100 in the minimum daily wage, commencing one week after effectively of the interest rate cap, and another P100-increase after one or two years as Congress may deem appropriate.

Considering that the interest rate cap has been tried and tested for decades under the regime of the Anti-Usury Law, these measures cannot by any means be considered radical, novel, or experimental.

The measures are expected to achieve the following:

1. Immediate relief of the labor, consumer and business sector, since this will result on lower production costs. The resulting cost-savings will enable the business sector not only to sustain the minimum wage increase, but also to stabilize if not actually reduce the prices of goods and services.

2. A compounded positive impact on purchasing power and effective demand which will result from the wage increases and price stabilization. This will revitalize businesses and thus spark the economy towards recovery and eventual growth.

3. Global competitiveness for the country’s producers, particularly the export sector.

4. Greater impetus for housing activity which is the most highly capital-intensive of all businesses. An increased level of housing and construction activity will catalyze business opportunities for 65 ancillary industries and provide more employment opportunities.

5. For the government, any potential loss from the tax exemptions to be granted (exclusively) to the bank lending transactions will be more than offset by (1) greater revenue prospects arising from expanded business activity throughout the entire economy, particularly in the housing/construction sector, as well as the revenue/foreign exchange earning from a more competitive export sector; and (b) reduced interest burden on its domestic borrowings.

6. For the banking system, an energized business sector would mean greater demand for loans and thus, greater business opportunities as well as lesser non-performing loans, even as the ensuing improvement in purchasing power would improve savings generations. Fears of any diminution in bank profitability or viability are largely unfounded, as an interest rate ceiling of nine percent – when coupled with the tax exemption privileges – will translate to an effective yield of not less than 12 percent, even as the banking system’s extremely conservative policies on collateral and loan-to-value ratios afford more than ample protection.

As can be readily seen, this package of measure corrects the major flaws in the credit delivery system, addresses the concern of all sectors including the banking system itself, and ensures that their respective interests are reasonably served.

Intermediate measures:

1. Legislative ban on the bank requirement for Joint and Solidary Security (JSS) clause currently being imposed on corporate loans. This is wholly unnecessary in view of the banking system’s stringent collateral requirements and appraisal/loan-to-value-practices, even as it represents an onerous and unjust burden for the individual officers and principal stockholders of a corporation.

2. Abolition of the 20 percent tax on interest income from bank deposits. This will encourage greater savings.

3. Expansion and strengthening of existing loan insurance and guarantee schemes extended to SMEs and other sectors covered by government-imposed credit allocations, in order to allay fears of possible lending risks.

4. Development of the secondary capital markets to encourage the flow of local rather than foreign capital. This will help insulate the economy from severe dislocations, as in the past, that may arise from the unpredictable flow of "hot money" of foreign speculators.

The economic crisis which has stretched to this unprecedented magnitude, and the length of time that it has inflicted untold misery upon the entire nation – without still any relief in sight – demand nothing less.