According to a report released by the Consumer Credit Authority last week, Filipinos’ use of digital lending apps will increase significantly in 2022. While this is certainly good news for the digital lending business, everyone else should be viewed with deep concern.
Online cash loan services are companies that offer small cash loans with very minimal requirements and handle the entire application and approval process via a smartphone app or, in some cases, SMS. Their products are attractive because they are easily accessible. The requirements are usually a valid ID and a working mobile phone number, approval is granted in minutes, and lenders who pay off their loans on time are given incentives in the form of higher loan amounts.
It is estimated that there are about 24 digital lenders operating in the Philippines. The numbers are a bit uncertain, and that in itself is a problem. Our recent study focused on 10 applications that are properly licensed and downloadable from Google Play and the Apple Store.
The immediate cash relief that digital lenders can provide to customers in dire straits is very expensive even in the best of circumstances. Typically limited to loans of P1,000, first-time borrowers can expect repayment terms as short as 7-14 days at interest rates of 21-48%. 5-6″ Informal Lenders. For large, long-term loans available to customers with good repayment records, the average interest rate is around 27.4%, with some lenders charging up to 65%.
Determining the interest rate of an online loan is actually very difficult. Unlike banks and other more formal lenders, most digital lenders blatantly circumvent regulations requiring clear disclosure of interest rates.
Along with high costs, many digital loan borrowers have found themselves on the receiving end of predatory and abusive collection practices. An in-depth study by the Philippine Center for Investigative Journalism (PCIJ) last year revealed some of these in graphic detail. This includes contact records and contact with friends, family and co-workers, and in some shocking cases even threats of death or other bodily harm.
Of course, these practices are highly illegal, and the agency most responsible for combating them is the National Privacy Commission (NPC). NPC has aggressively pursued rogue digital lenders, but admitted in a PCIJ article that it was losing ground. Agencies simply don’t have the staff or resources to respond quickly to every consumer complaint, and are at a disadvantage due to slow court processes.
what the government can do
I believe there are four measures that the government should pursue to protect the people. First, if there is any issue where Congress can productively apply its love of conducting “investigations for legislative aid,” it will be this. The proliferation of digital lending businesses appears to be fueled by gaps in existing laws and regulations. Whether this is due to poor enforcement or a lack of relevant legislation needs to be investigated urgently.
Second, the banking industry needs to be more aggressive in providing an alternative to the large market for micro-consumer lending that it is currently apparently ignoring. It is obviously a risky business sector for banks, but on the other hand, it is a sector where high demand is evident.
Third, NPCs should be provided with the resources they need to better carry out their consumer protection mission.
Finally, we need to improve consumer education. It seems pretty clear that many borrowers simply “don’t know what they’re getting into” when looking for a loan online. Adequately knowing about the true cost of a digital loan, the lender’s rights to information, and available complaint or dispute resolution services can help consumers make better choices and avoid getting into even more painful situations.