Interest rate caps pass first reading

Proposed amendments to the Civil Law (民法) that would cut the universal interest rate cap by half passed a first reading in the legislature yesterday.

The controversial proposals, an attempt to bail out debt-ridden credit and cash card abusers, would, however, seriously dent local banks' profitability and affect foreign investors' view of the local bourse, which is already threatened by rising political risks, analysts warned.

The legislature's Judiciary Committee approved two versions of amendments to Article 205 of the Civil Law proposed by lawmakers, which would lower the cap of annual interest rates to 12 percent and 10 percent, respectively, down from a current regulatory level of 20 percent.

In the initial stage of the second reading process, the two proposals will be put up for party negotiations.

The proposed interest rate cap would apply to all kinds of lending -- including unsecured loans, credit and cash card loans, car loans and housing mortgages -- if it should pass the final reading and take effect.

Lawmakers made the proposal in a bid to bail out the nation's estimated 500,000 card abusers who bear debts of more than NT$500,000 (US$15,385) each.

"It is inappropriate to reduce the universal cap [just to relieve indebted cardholders]," Minister of Justice Morley Shih (施茂林) said in the committee's question-and-answer session yesterday.

The Ministry of Justice is the authority that governs amendments to the Civil Law.

The ministry is drafting a chapter in the Civil Law that specifically regulates credit and cash card lending and will tender the amendment to the legislature for review by the end of next month, Shih said.

The ministry's proposed amendments could cap the annualized interest rate of credit and cash card lending, inclusive of all fee charges, at around 12 percent to 13 percent, according to Lin Chau-song (林朝松), head of the ministry's legal affairs department.

The cap is variable, based on the central bank's floating lending rate, which is currently around 3.9 percent, plus a fixed rate of between 5 percent and 8 percent, Lin said.

Under current practices, cash and credit card interest rates can approach the regulatory 20 percent level.

The amendments proposed by legislators would significantly dent banks' profitability and reduce interest revenue by NT$45 billion to NT$75 billion a year, bringing down finance stocks' return on equity by between 3 percent and 5 percent, Jesse Wang (王嘉樞), head of research at BNP Paribas Securities (Taiwan) Co, told the Taipei Times yesterday.

This could cast a shadow on the stock market due to foreign investors' growing concern over political risks and an uncertain regulatory environment, Wang warned.

In response, the Financial Supervisory Commission said that an overly low interest rate ceiling could lead to a credit crunch for banks, forcing an estimated 1.5 million people in need of cash to resort to the services of loan sharks, which would in turn create further problems such as exploitation and illegal debt collection activities.

"This also violates Taiwan's efforts to liberalize interest rates in the past 10 years" in compliance with free market mechanisms, said FSC chairman Kong Jaw-sheng (龔照勝), who was present at the session yesterday.

What really matters is that interest rates are transparent so that there are no hidden charges for lenders, Kong said, warning also that the potential credit crunch could weaken consumption and decrease economic growth.