BSP looks to remove salary loan tenor cap for flexible payments

THE BANGKO SENTRAL ng Pilipinas (BSP) is looking to remove limits on tenors of salary-based loans and instead allow financial institutions to decide on terms based on their assessment of borrowers’ capacity to pay.

This comes amid calls from teachers asking for longer loan repayment terms to help ease their financial burden.

A draft circular showed that the central bank plans to scrap the three- to five-year term limit for salary-based loans.

“The BSP seeks to enhance the regulations governing salary-based general-purpose consumption loans to provide greater repayment flexibility to borrowers and salaried employees, including teachers, and help ease debt-servicing burden, while ensuring adherence to prudent credit standards,” the central bank said. “Consistent with this objective, the revised regulations move away from a prescriptive prudential limit on loan tenor toward a principles-based approach.”

“The Bangko Sentral recognizes the helpful role of salary-based, consumer lending schemes in allowing an individual borrower to manage his/her cash flows provided these are granted under sound credit standards and fair consumer practices. The Bangko Sentral likewise encourages competition and transparency to promote efficient and innovative delivery of financial services and fair dealing with customers.”

Under the proposed changes, financial institutions are expected to decide on the terms and conditions of a salary loan, including the tenor and repayment structure, based on their assessment of the borrower’s creditworthiness, including their ability to pay, sources funds, and repayment history.

“The repayment period may likewise be set through mutual agreement between the lender and the borrower, subject to prudent credit risk controls,” the BSP said.

It added that loan renewals or extensions of maturity can only be granted after a reassessment of the borrower’s capacity to pay.

“Further, no loan renewal shall be allowed unless accrued interest receivable has been paid and there has been a substantial reduction in the outstanding principal.”

The proposed amendments also clarify the scope of salary-based general-purpose consumption loans, distinguishing them from other personal loan products.

“This includes credit accommodation for education, hospitalization, emergency, travel, household, and other personal consumption needs,” the central bank said.

Meanwhile, credit card receivables, motor vehicle loans, loans to individuals for housing purposes, and other personal loans for non-consumption purposes like those for business or income-generating activities, are not considered as salary loans, even if repayment is facilitated through salary deduction or similar arrangements, it added. — Bettina V. Roc