Unfortunately, there is a large constituency impressed by government intervention in price-setting. This is the source of so many distortions in our domestic economy that discourage investments. Consequently, we have become the investments laggard in our region once again.
When the pandemic hit us, we shifted to calamity mode. This provided good cover for emergency policies that put market forces in suspended animation.
The BSP, during this period of fear and confusion, imposed a cap on interest rates credit card issuers may charge their customers. That seemed like a merciful thing to do, considering how pandemic conditions were ravaging the finances of ordinary Filipinos.
That cap, however, created multifold distortions in the industry. At best, it discouraged new investments, and therefore new innovations, in the industry. At worst, it forced closure of some businesses. Maintained over time, this cap on credit card interest rates will cause the industry to stagnate.
It is always easy to caricature financing companies, including those that issue credit cards, as rapacious profiteers. No one, after all, loves paying interest rates on debt. But if the business is not profitable, the convenience of credit cards disappears.
Comfort has a cost. The entire range of industries made possible by technological advances in finance technologies are exuberant only because it is possible to profit from delivering financial services. Consumers benefit from access to more convenient means to complete their transactions.
Credit cards are a convenience we cannot live without. They enable us to dine and shop without having to carry bundles of cash. They enable is to purchase apps online. Without this convenience, the entire electronic marketing industry dies.
Next month, the BSP is scheduled to review the policy capping interest rates on credit cards. Already, politicians out to score populist points are loudly clamoring the cap be maintained. Whenever they do that, our economy gets skewed.
The Credit Card Association of the Philippines, understandably, favors lifting this cap. They prefer market forces to determine interest rate settings rather than submit this to regulatory dictate.
Without the cap, credit cards issuers could be more flexible in adjusting charges to the specificities of their customers. A higher rate might be charged a new borrower without a proven credit record. Card issuers, after all, assume greater risks with first-time clients.
Clients with a long record for credit discipline could be charged a lower rate as an incentive. Cards issuers will have greater elbow room for tailoring charges to prime and subprime borrowers.
Without thriving credit cards issuers, consumers can only turn to the gray market for short-term credit. An example are the notorious “5-6” lenders who impose exorbitant interest rates – mainly because they assume all the credit risks. This sort of gray market lending is done without the security of proper collaterals and the comfort of credit records.
Or else, short-term borrowers might turn to the pawnshops where they get the lowest assessments for the valuables they turn in as security for small loans. Interest rates in the pawnshop business far exceed whatever credit card companies might charge.
We have heard all the horror stories about how collection agents harass delinquent borrowers or how borrowers fall into perpetual debt because of usurious rates. Without the proper industry safeguards, consumer lending could become a savage jungle.
We should learn to trust market forces.
Lifting the cap on credit card interest rates will not mean the issuers will be able to charge whimsically. Credit card issuers compete among themselves to offer the most satisfying services at the most affordable rates.
Trust that in a freely contested market, those who offer us financial services will be disciplined by competition. Without the cap, we will have robust providers of financial technologies and contented consumers.
An interest cap distorts the operation of market forces. It is ultimately unsustainable.
Food terminal
The so-called “Kadiwa sa Pasko” was clearly a public relations stunt, a photo opportunity and nothing more. It cannot be a viable method for addressing the public’s concerns over rising food prices.
All the Department of Agriculture did was to provide a few tables and invite some farmers to offer their goods for sale – but for only a few days. It did feature a few items, such as broken rice from the NFA, sold below their usual prices. It is not a proper program to address the inefficiencies that injure both our farmers and our consumers.
Now, it seems, the stunt has backfired. Consumers everywhere are clamoring for more Kadiwa outlets. Farmers are demanding a more reliable program to serve as an outlet for their produce.
The original Kadiwa program was anchored on a pro-active Food Terminal, Inc. (FTI). This government agency established cold chains and guaranteed farmers a better price for their produce. FTI, therefore, provided the logistics hub that our agriculture lacked. In fact, it went beyond that by providing financial support for its farmer clientele.
Of course, the Kadiwa program was heavily subsidized. But the subsidy was focused on building an absent logistics chain for our agricultural production.
Over the years, the FTI was allowed to shrivel. Its land was sold. Its remaining staff appears content to passively simply rent out the assets the government company owns.
If this administration is interested in arresting food price inflation, it must look beyond PR stunts and plug the gaps in our logistics system. It should rally the private sector to invest in making food distribution more efficient and less wasteful.