August 29, 2022

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How can un(der)served Filipinos leverage debt

By Ana Olivia A. Tirona, Researcher

KAMILA O. PARAS, a 59-year-old local government unit employee, was one of the few Filipinos that got cold feet when it comes to credit.

About five years ago, Mrs. Paras was looking into buying a house and lot with her 61-year-old spouse but could not swallow the “hard pill” that is called credit score. The couple wanted to purchase their own home after years of renting, but the hardships of requirements and settlements overwhelmed the couple.

They were asked about their credit score after finding the perfect house. However, neither of them felt confident of their credit score.

“I think my credit card somehow helps me, which I only got later on in life. But I don’t use it often like some people do. I’ve had experiences where I didn’t pay on time. Sometimes I don’t push through with the purchase because it is quite expensive to pay off later,” Mrs. Paras said in an interview.

“The thought of utang to a bank is just scary. So, I don’t know how my credit is looking,” she said.

“It’s such a worry to take out loans, and so that time was a rough one for us. A lot needs to be considered. Borrowing rates and having steady income. We didn’t push through with that one house anymore, it just seemed like a lot of work and just the thought of credit score kind of discouraged us,” Mrs. Paras added.

With that in mind, how can the underserved and unserved Filipinos navigate through credit gain opportunities and leverage debt without fear?

UNDERSTANDING THE UN(DER)SERVED
In Bangko Sentral ng Pilipinas’ (BSP) National Strategy for Financial Inclusion 2022-2028, the underserved and unserved segments of the country are part of the financially excluded people that the central bank wishes to address in their seven-year plan.

The BSP identified that the underserved and unserved are senior citizens, migrant workers, persons with disabilities, indigenous peoples, forcibly displaced persons, those who are excluded due to religious beliefs. Most notably, those who are also financially excluded are those in agriculture, micro, small, and medium enterprises (MSMEs), startups, and informal workers.

In the 2021 Financial Inclusion Survey (FIS), the share of adults that hold a formal credit climbed to 25% from 19% in 2019. However, banks are still the least preferred source of formal credit but remain to be the main source of formal savings at 31% and second spot in account penetration at 23%.

Furthermore, the survey showed that half of the Filipinos believe that borrowing from formal institutions was challenging. Sadly, the common perception shows that the bigger the borrowing need is, the more reluctant they are.

It is vital for the BSP to continue to expand its financial inclusion for credit opportunities. Examples of their initiatives are to promote the use of alternative data (ex. data retrieved from social media, mobile data, utilities data, behavioral data, online transactions, geolocation data, and browser data, among others, usually not collected by the financial institutions, etc.,) and developing a better framework for harnessing data for credit evaluation for those in agriculture and MSMEs.

In a study by information solutions agency TransUnion titled “Empowering Credit Inclusion: A Deeper Perspective on Credit Underserved and Unserved Consumers” released last June 14, the results of the surveys aimed to shed light on the credit situation of the target segment.

The study described underserved as those that “have minimal credit participation, limited to a single type of credit product and no more than two open accounts of that type, and have been active in the credit market for at least two years. Furthermore, the unserved are consumers that have no history of an “open traditional credit product.”

Before diving into possible credit gain opportunities for Filipino consumers, what is credit and credit score?

In simpler terms, credit is  when a consumer buys a specific good or service without immediate payment. But will pay the lender — such as a bank — what is due at a later time.

Meanwhile, a credit score is a report of how well a borrower has been paying off their debt. Having good credit score will allow you to have more access to loans and financial services.

For consumers like Mrs. Paras and her husband, their journey with credit is unstable because they feel that debt equals bad. And so, when the time came for them to report a credit score, they felt discouraged.

In a written response to BusinessWorld, TransUnion Philippines Regional President and Chief Executive Officer Pia L. Arellano describes credit as an aid to help Filipino consumers access financial products and services.

“Good credit is essential, as it will allow Filipinos access to loans and credit cards to help them achieve their financial goals. Aside from this, Filipino consumers can also use credit for online shopping, protection for purchases, extra financial security, and even for maintaining their very own business,” Ms. Arellano said.

“Whether people realize it or not, credit score really does play a large part when it comes to your own personal finance. Credit scores are the lender’s basis for deciding whether you’re a good risk. They look into these as proof of how likely you are to pay back your debt,” Ms. Arellano added.

TransUnion’s study on credit, which surveyed 11,100 adults (ages 18 years and older), showed that unserved and underserved Filipinos “expect their need for credit” to increase in the next three to five years.

The most common reason why the surveyed population did not want credit or to have more credit is they “don’t want to go into debt.” About 40% of the underserved Filipinos surveyed said they are worried about not having control of finances. As such, 32% of the underserved explained how they would take advantage of credit if only it had lower weekly and monthly payments.

Likewise, when the opportunity arises for these consumers, they reject the credit offer because of high interest rates.

In truth, there is potential for these consumers. If only lenders would become more accommodative.

FINDING WAYS TO LEVERAGE DEBT
BDO Unibank, Inc.’s (BDO) primary goal for the unserved and underserved segments of the population is to have more access to credit.

In a written response to BusinessWorld, BDO assures that consumers can take advantage of debt in many ways:

• Augment cash to fund basic needs, spend for renovation or repair of house or vehicles; pay for unforeseen expenses; or fund working capital to start or expand a business.

• Manage cash flows for things like school tuition fee payments.

• Purchase of big-ticket items sooner such as house and lot or a vehicle.

• Pay off debts with new funds (refinancing) at terms that may be more favorable for them (e.g., longer payment terms or installment schemes).

To date, BDO offers loans such as for personal, auto, home, and MSMEs.

In fact, BDO Network Bank, Inc. (BDO NB) — a subsidiary of BDO — operates as a rural bank which targets consumers in far-flung areas of the Philippines.

“To serve the banking needs of the un(der)served markets especially in the rural areas, our rural bank subsidiary, BDO NB offers Salary Loans and Kabuhayan Loans,” the bank said.

BDO NB’s Salary Loan are categorized as personal loans which can be used for various needs. This offer entails a more convenient way of paying off debt through salary deductions.

Similarly, the Kabuhayan Loan is catered to MSMEs to give financial support to those expanding and growing their businesses. Specifically, this can be used for purposes such as working capital or fixed asset acquisition.

However, affordability may still come at a cost.

“The bank may face potential decline in asset quality or rise in nonperforming loans (NPL) on unsecured loans,” BDO said.

But a “robust credit process, constant account monitoring, and site-visit to clientele’s place of business” could ensure the bank’s corporate standard.

EASY, BREAZY, CREDIT
For people like Mrs. Paras that are struggling with credit, leveraging debt should be easy, affordable, and convenient.

Despite financial uncertainty and rising global prices, banks like BDO assure its consumers that access to credit is “more important to the un(der)served than rates.”

On the other hand, TransUnion also calls for better financial inclusion and financial literacy.

“Lenders can play a critical role in helping more consumers become actively engaged in the credit system and promoting greater financial inclusion. With this, it can be said that the consumer experience plays a large factor in the reasons why unserved and underserved consumers are hesitant or less likely to take up a credit offer,” Ms. Arellano said.

“It is important for banks and financial companies alike to develop and offer credit products and services that are more tailored to their lifestyles,” she added.

There will always be factors to be weighed in by both the borrower and lender just as long as access is not limited to those who are financially sound.

“Maybe in the long-term, we can finally present a good credit score to buy our dream house. If not, that’s fine,” Mrs. Paras said. “Wherever it’s simple and hopefully affordable, I’ll choose that.”