The Securities and Exchange Commission (SEC) proposes slashing the effective interest-rate (EIR) ceiling from 15% to 10% per month for unsecured small loans, potentially higher after consultations. Aimed at curbing predatory pricing and hidden fees, the move draws industry criticism for possibly contracting credit supply. The draft circular expands coverage to loans up to P20,000 and terms up to six months.
The SEC's proposal follows the 2022 price cap aimed at regulating digital and app-based lending in the Philippines. The agency argues it is essential to stop debt-trap cycles and harassment by some operators, under the Financial Products and Services Consumer Protection Act (RA 11765). It includes a 100% total-cost cap to ensure no borrower owes more than double the amount borrowed.
However, lenders warn that lowering the cap while expanding coverage will squeeze margins, especially for high-risk portfolios. Approvals may tighten, minimum loan sizes rise, or retreat from informal income borrowers, potentially driving them back to the informal '5-6' market. With over 70% of the Philippine workforce informal, risks remain elevated.
International examples highlight pitfalls: Kenya's 2016 cap reduced credit access for micro businesses by 25%, leading to its repeal. Cambodia's 2017 measure shifted microfinance institutions to larger loans, distorting the market. India's 2011 experiment saw similar contractions.
The SEC invites comments and possible adjustments to balance consumer protection with market viability. It could spur innovation in underwriting and technology, akin to Kenya's M-Pesa or India's AePS, making lending more efficient for informal workers like sari-sari store owners and SMEs.