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Fighting Abusive Rates on Loans and Credit Cards*

SAN SALVADOR, Oct 23 2012 (IPS) - The parliaments of El Salvador and Guatemala are debating bills aimed at halting abusive loans and high credit card costs. But the initiatives have run up against strong opposition from the financial sector.

Legislators in El Salvador are considering a law against usury that would put a ceiling on the interest rates charged on direct loans and on credit cards. And in Guatemala, lawmakers are studying a credit card law that would not set a maximum rate but would attempt to halt abusive charges on plastic money.

The governing leftwing Farabundo Martí National Liberation Front (FMLN) and the Great Alliance for National Unity (GANA), which together have a parliamentary majority in El Salvador, are promoting the bill to regulate the “active” interest rates charged by banks to borrowers.

The initiative is a response to constant complaints by the public and by consumer defence organisations about the high costs of borrowing and the excessive profit margin compared to the “passive” interest rates paid by banks on account-holders’ deposits.

The bill has been under debate in the Salvadoran legislature for the last three months. But after five articles were approved, discussion has got bogged down on the nub of the issue: the imposition of maximum limits on interest charged by banks.

“No country can be competitive if people have to pay excessively high interest on loans or credit cards,” FMLN lawmaker Antonio Echeverría, one of the sponsors of the bill, told IPS.

El Salvador’s Office of the Financial Superintendent (SSF) reports that interest rates for consumer loans over a year or more vary from 28.9 percent at the Bank of Central America and 198 percent at Banco Azteca.

Banking and financial activity is regulated by the SSF and a 1999 law which allows banks to set their own rates of interest.

The SSF report also says that as of Sept. 30, interest payable on deposits ranged from 0.10 percent at Scotiabank for 30-day deposits to 1.75 percent at Banco G&T Continental of El Salvador, for deposits of one year.

GANA legislator Francisco Zablah told IPS that the disparity between active and passive interest rates shows that the financial sector “is taking advantage of consumers.

“We will not allow such a huge gap between what is charged for a loan and what is paid for deposits,” he said.

Members of Congress in El Salvador have still not reached agreement about how to limit interest rates. But the most popular idea is to come up with a mathematical formula for a reference average rate, which would be the ceiling rate for bank interest charges. The legislators expect this rate would not be above 48 percent.

But the financial sector is staunchly opposed to setting limits on interest rates, especially for credit cards, the most profitable line in Salvadoran banking.

The return on the credit card market is an average of 17.6 percent, far higher than for the rest of the operations, says the report “Estudio de las Condiciones de Competencia en el Sector de Tarjetas de Crédito y Débito en El Salvador” (Study on competition conditions in the credit and debit card sector in El Salvador), published by the Competition Superintendency in 2011.

The Salvadoran Banking Association (ABANSA) ran an advertising campaign claiming that if limits were set on credit card interest rates, the market would be restricted to 300,000 cardholders compared to 800,000 at present, in this country of 6.1 million people.

Their ads stated that banks would not be able to provide small loans to credit card holders, because they are high-risk and not viable at interest rates below the current ones.

But Zablah said “ABANSA is just protecting the banks’ interests.”

The Association of Microfinance Organisations unexpectedly came out in support of the banks, saying that if the bill were approved, 1.27 billion dollars in loans for micro and small businesses would be at risk, affecting both the microcredit sector and the country’s productivity.

A study by the Competition Superintendency reported that the credit card sector combines a high rate of return with a high degree of market concentration, which gives financial companies plenty of opportunity to exploit their market share, to the detriment of consumers.

The sector is regulated by the Credit Card System Law, in force since 2009, which does not set interest rate limits.

In Guatemala, meanwhile, Congress has been debating a credit card bill since 2011 that aims to regulate interest rates, commissions, extended financing and the evaluation of applicants’ ability to pay, and to establish credit card cloning as a crime.

The draft law does not set a limit on interest rates, but it does stipulate they should be negotiated with cardholders and not increased except through an established procedure.

It also indicates that interest on loans cannot be capitalised or calculated including commissions and other charges, payment for which must be according to services provided to each cardholder and negotiated in their contracts.

The congressional Economy Commission pointed out that the sector has 748,000 cardholders and controls 20 percent of the consumer credit portfolio, and should therefore not continue to be regulated by the 1970 Commerce Code.

Arturo Quezada of the Insurance and Securities Consumers Defence Association, a civil society organisation, told IPS the absence of credit card regulations “lets the issuing companies charge what they like for interest and repayments,” and allows them to commit other abuses as well.

Quezada said he was in favour of interest rate regulation “because there are abusive charges on credit cards of up to 50 or 60 percent a year.” But he said he was not in favour of establishing a maximum rate.

“The issue of most concern is that interest payments on credit card debt are not explained, nor are the percentages, let alone what has been paid,” he said.

Carlos González of the Association for Social Research and Studies (ASIES), a private local think tank, told IPS that passing a law on plastic money would be a positive step because of the importance of credit cards to much of Guatemala’s population of 15 million people.

However, he too was against fixing a limit on interest rates and suggested, instead, allowing free competition to do its job, pointing out that “the country has monopolies in beer and in cement, whereas the banking system is an oligopoly.”

“This distorts market prices, but there is no oversight,” he said.

* With reporting by Danilo Valladares in Guatemala City.

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