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Restructuring credit card debt just got better

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Banks and affiliate credit card companies have an effective way of assisting problematic credit cardholders to restructure unpaid debts and it just started this month.

It began when the Bangko Sentral ng Pilipinas (BSP) first broached the idea to the members of the Credit Card Association of the Philippines (CCAP) on how to work on a debt restructuring program that is an improvement to the way individual banks deal with problematic customers.

Alex Ilagan

Alex Ilagan

The truth of the matter is, banks’ way of rehabilitating unpaid credit card accounts is hardly encouraging. The interest rates are not low enough, payment period is not long enough and what if there are more than one credit cards to settle?

After months of discussions the BSP, the CCAP and one non-CCAP member BDO Unibank, Inc., crafted the inter-bank debt relief program (IDRP) which was officially presented to the banking public last week.

CCAP Executive Director Alex Ilagan said BSP had wanted a more advantageous way of recovering credit card debts and at the same time assuring cardholders that it will not damage its credit history in the long run.

“BSP is the regulator who introduced the idea and pushed for an industry-wide debt restructuring program in order to give financial consumers a chance to be rehabilitated and recover from their indebtedness,” said Ilagan.

CCAP members are all on-board. Its members include Asia United Bank, Bank of Commerce, Bank of the Philippine Islands, Citibank, China Banking Corp., Eastwest Banking Corp., Equicom Savings Bank, HSBC, Maybank, Metrobank Card Corp., Philippine National Bank, RCBC Bankard, SB Cards Corp., Standard Chartered Bank, and Union Bank of the Philippines.

BDO is not a member but the country’s biggest bank is a participating bank in the IDRP. “BDO will have exactly the same responsibilities as the other CCAP member banks even if they are not a member of CCAP,” said Ilagan.

The debt relief program will cover only credit card debts for now. But, according to Ilagan, unsecured personal loans will be included in the program by October this year.

Will IDRP help distressed financial customers?

It will not be easy but for the “well meaning” credit cardholders – at least the ones who could convince a bank or banks (in cases of several credit card loans) of their sincere willingness to settle their debts – they can get enrolled into the program without too much harsh rules. Still, the requirements and prerequisites seem severe and disciplinary at first.

Ilagan is hopeful. “We definitely expect delinquent cardholders to take advantage of this opportunity to secure more liberal terms for the restructuring of their credit card debts compared to negotiating individually with the issuing banks,” he said.

The intention after all is to help highly indebted cardholders to be “back on track towards responsible credit use.”

In other words, this is a second chance to correct a threatened credit history since a successful rehabilitation means the customer can start anew and treated as a new applicant the next time they apply for a credit card.

To enroll in the program, banks will assess the financial capacity of the cardholder to repay the debt and the review includes the customer’s income and expenses summary.

The IDRP allows up to 10 years repayment period depending on cases of indebtedness. The interest charges will be set at 1.5 percent per month or lower, again depending on how severe the case is.

Once approved for debt restructuring, the customer’s existing credit cards will be blocked or cancelled, all rebates or rewards earned forfeited and they will be barred from applying for new credit cards while under the program.

In cases where a customer has several credit cards for settlement, the involved banks will be coordinating among themselves to make it more “streamlined and convenient” for the cardholder to transact payments.

During the launch of the IDRP, the BSP and CCAP disclosed other rules such as all credit card accounts must be at least six months old to participate in the program. In addition, the outstanding balance should at least amount to P10,000 per card and if there are several credit cards to one customer, at least P100,000.

However, while customers enrolling in the program are required to disclose and include all problematic credit cards, this should include credit cards that are not even delinquent at all. That one good credit card will also be blocked or cancelled. CCAP said this prevents customers from being tempted to make cash advances in one card to pay off another.

The customer’s name will also be reported to the Credit Bureau. Once reported, a cardholder will be blacklisted and will be prevented from applying for new loans.

“The reporting of their names to the bureau and the automatic cancellation of all credit facilities is a precautionary measure to prevent possible abuse,” remarked Ilagan.

“Otherwise, a cardholder might continue borrowing from another credit card in order to pay-off the cards enrolled in IDRP.”

It may seem that CCAP is overly harsh, but considering that only 1.39 percent of credit card receivables (CCR) or about R2.32 billion are under current debt restructuring by individual banks, they have some numbers as backup for their caustic ways.

CCAP placed the CCR at P167.41 billion as of end-2015. Data from the BSP show that bank proper CCR totaled P178.49 billion last year while subsidiaries (or the thrift banks of the big banks) had P43.60 billion as of end-2015. Of these numbers, P13.47 billion are non-performing, meaning it is debts unpaid, for bank proper. The subsidiaries reported P991 million non-performing CCR.