Reacting to the rising trend in salary loans in terms of volume and number of accounts, the Monetary Board has approved a new Circular specifically defining salary loans and enhancing the reporting templates used by banks and non-stock savings and loan associations to accurately measure its volume.
The BSP defines salary loans as “unsecured loans, granted to individuals on the basis of regular salary, pension or other fixed compensation, where repayment would come from such future remunerations, either through salary deduction, debit from the borrower’s deposit account, over-the-counter payment or other type of payment arrangement agreed upon by the borrower and lender.”
Under the new Circular, salary loans will now be separately reported under the Loans to Individuals for Consumption Purposes (LICP) sub-category. Previously, only credit card and auto loans have separate line items under LICP. The new Circular covers the reporting period ending 30 June 2014 and onwards.
The BSP is likewise readying an appropriate regulatory and policy framework on salary loans to ensure that the exposures of BSP supervised institutions are well-managed and that the credit underwriting practices subscribe to safety and soundness principles. Also embedded in the framework are consumer protection issues such as potential over-indebtedness that need to be addressed at an early stage. The work-in-progress framework will take into account the actual practices, macro-economic environment, and interplay among the lending institutions, government agencies, private entities and the borrowers.
The BSP noted that a large and growing number of bank and non-bank institutions compete for the salary loan business and that the banking system has a significant market share of the whole pie. There are also other players, such as informal lenders, in this business line that are not captured in the financial system statistics. With the enhanced reporting from its supervised entities, the BSP can now collect data for better monitoring of salary loans that will support more pro-active policy-making.