Lowering interest rate ceilings on revolving credit will have a limited effect on reducing credit delinquency and may come at the cost of cutting off credit for low-income borrowers and small businesses, two visiting academics said yesterday.
Hiroshi Domoto, a business and information professor at Tokyo University of Information Science, said Japanese money lenders have tightened credit in anticipation of the interest ceiling regulation, driving borrowers to their relatives and loan sharks.
LOAN SHARKS
“The number of people contacting loan sharks rose from 30 percent in 2007 to 35 percent in 2008,” Domoto told a media briefing sponsored by the American Chamber of Commerce in Taipei and the European Chamber of Commerce Taipei.
Domoto, whose country amended its lending law in December 2006 to cap interest rates at 20 percent next year, from the current 29.2 percent, urged the Taiwanese legislature to approach rate controls with greater caution and patience.
He said some Japanese lawmakers now question the wisdom of the amendment, after which loan approval rates dropped from 55 percent to 30 percent and outstanding loans shrank from ¥8.5 trillion (US$85.5 billion) to ¥5.8 trillion.
FLEXIBILITY
“Owing to their flexibility, consumer finance and credit cards are widely used by small and medium-sized firms,” Domoto said.
However, the cash positions of small and medium enterprises “have deteriorated as lenders have raised review standards to cope with changes in the law,” Domoto said. “Corporate failures hit a six-year high in 2007.”
Anna Ellison, director of Policis, a British independent consultancy on policy development, said the UK decided in 2005 not to introduce rate limits after conducting in-depth studies and debates.
“Borrowers who are economically disadvantaged often use loans on daily necessities,” Ellison said. “Problems caused by credit exclusion are even more detrimental than high interest rates.”
Rather, the most powerful mechanism for lowering interest rates is competition, Ellison said, adding that greater corporate efficiency and scale could lead to lower interest rates.
ALTERNATIVES
She suggested that policymakers explore alternatives such as consumer protection laws and transparent disclosure of loan costs to enhance responsible lending and financial inclusion.
The legislature has approved on first reading a proposal that seeks to replace the 20 percent interest rate ceiling with a floating formula that will be based on 9 percent above the central bank’s rate on loans without collateral (3.5 percent at present).
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