Transparent Pricing Workshop
Implementing the New Rules for
Truth in Lending
Time
Session
830am
Registration
900am
Opening Activities
930am
About Pricing Transparency
1015am
Break
1030am
BSP Circular 730 &
Memorandum M-2011-040
1230pm
Lunch
130pm
Preparation and Action Steps
500pm
Closing Activities
Speaker
Prior to the session, you should have the
following:
1. Laptop running on Windows OS with MS
Excel
2. Data on sample loan product:
–
–
–
–
Interest rate;
Finance charges,
Term of the loan;
Other conditions (forced savings amount,
mandatory insurance); and,
– Frequency of collection.
3. Sample disclosure forms
• The following materials will be provided:
1.
2.
3.
4.
5.
Cartolina
Coloring pens or crayons
Paste
Pictures
Crayons
Objectives
1. Discuss and clarify what pricing
transparency is all about.
2. Share insights and requirements for
compliance to BSP Circular 730 and
Memorandum M-2011-040.
3. Provide steps to transition loan products
from flat rates to declining balance
method.
Key Questions
• What is pricing transparency?
• What does the recent BSP Circular 730 &
Memorandum M-2011-040 mean for rural
banks?
• How do we prepare for such regulations?
• What are the action steps for banks?
PRICING TRANSPARENCY
How much is a kilo of banana?
How much is a car?
Model X
Model Y
Model Z
Color
White only
White, Black,
Gold
White, Black,
Gold
Wheels
Standard mags
Aluminum high
performance
mags
Aluminum high
performance
mags
Engine
Diesel
Gasoline
Gasoline
Other features
Manual
Manual
Automatic
Power windows
Power windows
and locks
Keyless entry
Note: Add motor insurance (P20,000), car registration (P50,000)
But if we rent a car, what is the price?
Softdrink
P50.00
VAT (12%)
5.36
Vatable
44.64
Vat-exempt
0.00
Vat-zero-rated
0.00
TOTAL
50.00
How much is cash?
Since we do not make our own money, we
are thus forced to ‘rent’ money...
What is the price for borrowing (renting)
money?
Republic Act 3765
(Issued June 22, 1963)
Pricing Transparency
• What is it?
– the price, terms, and conditions of financial
products are adequately and clearly disclosed to
clients
Disclosure of price terms and
conditions of financial
product to clients
Pricing Transparency
• Why is it needed?
– So clients can have accurate understanding of
prices
– To allow comparison of different products
– Protect reputation of banks. If buyers get
abused, banking becomes a tarnished
industry.
– Transparent pricing protects the poor and
protects the rural banking industry
(MF Transparency, 2011)
Benefits of Transparency
Industry
• Gets a database from which
it can take up issues with
policy makers
• Image of the industry
becomes more positive and
responsive
Banks/MFIs
• Learn what the market
price is, where they
stand, and take steps to
refine pricing strategy
Consumers
•Know the real price – they
can decide whether they want
to borrow.
•Choose between competing
loan products or MFIs using
comparative data
Benefits of Transparency
• Funders and donors:
– Know what their client MFIs charge their
customers
– Choose their partners accordingly
• Regulators
– Observe the prices prevailing in the market
– Sharpen their ability to intervene specifically and
refine policy
Source: Laila Deles, MF Transparency, 2011.
BSP CIRCULAR 730
(Issued July 20, 2011)
Perspective
Understanding it from the point of
view of the customer
Quick Exercise
Loan Amount
120,000.00
12 months term, 5%
3% service charge
1.5%
3.15%
3.50%
Nominal
Effective
51.18% Annual EIR
BSP Circular No. 730
Enhancing Loan Transaction Transparency
Method of computing interest. Banks may only
charge interest based on the outstanding
balance of the loan at the beginning of an
interest period.
25
Definition of Terms
• Finance charge
– includes interest, fees, service charges,
discounts, and such others incident to the
extension of credit.
• Simple annual rate
– uniform percentage representing the ratio of the
finance charge and the amount to be financed,
assuming that:
• One-year term,
• Lump sum payment upon maturity, and;
• No upfront deduction of principal
What is included in the
calculations?
Included
• Service charges
• Documentary Stamps
• REM/CM fees
• Appraiser’s fee
• Notarial fees
• CTC (cedula)?
• Barangay clearance?
• GRT?
Excluded
• Savings collected
• Insurance
• Other conditions:
– If assumptions are different, then the Effective
Interest Rate (EIR) shall be calculated and
disclosed as the relevant true cost to the
borrower.
– For contractual interest rate stated on a
monthly basis  EIR is stated on a monthly
basis.
So what is EIR?
• Effective Interest Rate
– Rate that exactly discounts future cashflows
through the life of a loan to the net amount of
loan proceeds.
– Uses IRR (Internal Rate of Return) method.
And IRR is?
• Internal Rate of Return
– Rate that makes the net present value of all
cash flows from a particular loan equal to
zero.
– Also also known as the “Economic Rate of
Return”
– Extensively uses discounted rate of return of
cashflows.
Exercise 1: Calculating annual and monthly EIR. For
each scenario, assume:
Loan Amount
120,000.00
Contractual Rate (Monthly)
1.50%
Other Charges
3.00%
No. of Monthly Installments
12
Exercise 2: Just like Exercise 1, do the same for
your bank’s loan product.
(Total Time: 30 minutes)
Sample Chart 1
Cases/Scenarios
Annual EIR
Fixed equal amortization
??
Fixed principal amortization
??
Fixed equal amortization with
grace period
??
Case: Periodic interest
payment, balloon payment at
maturity
??
Fixed equal amortization with
weekly installments quoted in
monthly EIR
??
Use current bank product
??
Monthly EIR
Sample Chart 2: Monthly EIR
Cases/Scenarios
Loan = P10,000
Weekly payment
(6 months)
Contractual rate = 1.5%
Loan = P10,000
Weekly payment
(3 months)
Contractual rate = 1.5%
Fixed equal
amortization
2.48%
3.48%
Fixed principal
amortization
2.50%
3.49%
Fixed equal
amortization with
grace period
2.15%
2.69%
Case: Periodic
interest payment,
balloon payment at
maturity
2.03%
2.67%
BSP Circular No. 730
Enhancing Loan Transaction Transparency
Information to be disclosed. The following are the minimum
information to be disclosed:
a)Total amount to be financed
b)The finance charges (includes fees, interest, service charges,
discounts and such other charges incident to the extension of
credit)
c)Net proceeds of the loan; and
d)The percentage the finance charge bears to the total amount
to be financed expressed as simple annual rate or an effective
annual interest rate (EIR). EIR may also be quoted as a monthly
rate in parallel with the quoted contractual rate
36
• Exercise 3: Show and explain sample
disclosure forms or disclosure statements.
• Instructions:
1. Group into 3 or more groups.
2. Choose a sample disclosure form for study.
3. Discuss the following questions:
•
•
•
What is the difference between your bank’s
disclosure form and the new disclosure form?
What needs to be improved in the disclosure form in
light of Circular 730?
How do we make the disclosure form understood by
clients?
4. Present findings to the group.
Time: 15 minutes
PREPARATION & ACTION
STEPS
Step 1:
Product/Pricing
Review
Product Analysis
Scenario Analysis
Step 2: Check Market
and Bank Impact
Price Impact
Sensitivity Analysis
Develop Tiered
Pricing Strategies
Step 3: Approval and
Internal Roll-out
Marketing and
Communications
Planning
IT/MIS Modification
Internal Training
Step 4: Customer
Handling
Put up posters and
PR collaterals
Develop and
implement customer
handling script and
processes
Change Process Flow
• STEP 1: Product and Pricing Review
1. Review products affected by Circular 730. That
is, review all loan products in particular those
using flat rates.
2. Conduct scenario analysis for each product if
these are calculated based on the following
scenarios:
a)
b)
c)
d)
Use current terms and conditions
Use simple annual rates
Use EIR on an annual basis
Use EIR quoted on a monthly basis
3. Compare these with the original flat rates.
• Exercise 4: Conduct scenario analysis with
one sample bank product. (30 minutes)
Scenario 1
Loan Amount
Contractual
Interest Rate
No. of
Installments
Installment
Amount
Finance Charges
Annual EIR
Monthly EIR
Breakeven Point
Scenario 2
Scenario 3
Change Process Flow
• STEP 2: Test Market & Bank Impact
1. Considering market perception and
competition, choose which scenario is best
acceptable for the bank.
2. Conduct sensitivity analysis by tweaking
components of the finance charges or
mandatory fees to reveal competitive prices.
3. Consider tiered pricing mechanisms for each
market.
Survey of
Competitor
Prices
Client
Perception
through
surveys
Risk Profile
of Client
Competitive
Pricing
Internal
Target
Interest
Rates
Competitor Survey
Lender
Annual EIR
Commercial Bank
??
Your Bank
??
Rural Bank
??
Finance Company
??
Microfinance NGO
??
Pawnshop
??
Informal Lender
??
Monthly EIR
Sample Survey Tool
COMPETITOR SURVEY
Date of Survey:
Bank/Institution:
Type of Loan Product:
Loan Amount, PhP
Name of Loan Product
Minimum
Maximum
Contractual Interest
Rate1
Salary loan
Microenterprise loan
Car/Auto/Motorcycle loan
Multi-purpose loan
Micro-agri loan
Housing micro-finance loan
Others (please specify):
______________
______________
Finance charges:
Name of Loan:
Name of Loan:
Name of Loan:
Name of Loan:
Service charge
Documentary stamps
Insurance (MRI)
Micro-insurance, if required
Others (please specify):
______________
______________
______________
Service charge
Documentary stamps
Insurance (MRI)
Micro-insurance, if required
Others (please specify):
______________
______________
______________
Term of Loan (No. of Installments2)
Minimum
Maximum
• Exercise 5: Conduct sensitivity analysis
with sample loan product. (30 minutes)
Scenario 1
Loan Amount
Contractual
Interest Rate
No. of
Installments
Installment
Amount
Finance Charges
Annual EIR
Monthly EIR
Scenario 2
Scenario 3
Sample Tiered Pricing
Loan Amount
Effective Interest Rate
per month
Terms
Less than P5,000
3%
3-6 months
P5,000 – P10,000
2.75%
3-6 months
P10,000 – P25,000
2.5%
3-9 months
P25,000 – P50,000
2.25%
3-9 months
P50,000 – P100,000
2.0%
6-12 months
Greater than P100,000
1.75%
6-12 months
Strategies to Mitigate Impact
• Drop or reduce some finance charges. What can
be dropped or reduced?
• Change collection practices to become optional.
What are the collection terms that can be
modified? Are you prepared to lower rates if loan
payment is made at the branch?
• Spread service charges throughout the term of
the loan.
Strategies to Mitigate Impact
• Educate borrowers on why EIR rules are in
place and how this may not really affect the
amount and quality of the loan.
• Unbundle embedded products (insurance,
savings, etc.)
• Other strategies?
Change Process Flow
• STEP 3: Approval and Internal Roll-out
1. Recommend the final prices for the loan
products to the Asset & Liability Committee
or similar price-setting body within the bank.
2. Prepare the corresponding marketing &
communication materials for distribution and
to explain to staff and customers.
3. Modify IT/MIS system
4. Conduct internal trainings about the new
pricing schemes including how to handle
customer reaction.
• Exercise 6: Develop procedures or work plan
for internal roll-out. (Total time including
group presentations: 30 minutes).
1. Divide into 3 or more groups.
2. Each group will provide transition procedures
based on assigned topics (Marketing,
Communications, IT).
3. Each group is given a maximum of 10 minutes
to present their general procedure.
Action Planning
ACTION Step Activity
Date
Person in
Charge
Resources
Change Process Flow
• STEP 4: Public Communications &
Complaint Handling
“x307.4 Posters. Bank shall post in
conspicuous places in their principal place of
business and branches, the information as
contained in the revised format of disclosure
statement .... The posters shall include an
explicit notification that the disclosure
statement is a required attachment to the
loan contract and the customer has a right to
demand a copy of such disclosure.”
Change Process Flow
• STEP 4: Public Communications &
Complaint Handling
1. Put posters about the new pricing scheme
including:
•
•
Notification that the disclosure statement is a
required attachment to the loan contract, and;
The customer has a right to demand a copy of
such disclosure.
Change Process Flow
• STEP 4: Public Communications &
Complaint Handling
2. Prepare price comparisons between
competitors in case customers inquire and
compare the bank with other lenders (banks,
pawnshops, finance companies, NGOs).
3. Prepare script to be used by frontline staff for
common complaints such as:
• Perceived high price, effect on existing loans,
Tips for Communicating
1. Develop key messages: “The new interest
rates is about ...”
2. Write down key messages and assign
branch point person.
3. Use posters as aid in explanation.
4. Compare differences and similarities from
past and present loan proceeds.
5. Be honest and professional in approach and
demeanor.
6. Other tips?
• Exercise 7: Develop scripts for customer
inquiries and complaints. Do a role play.
AND/OR
Develop a sample poster they can use to
display in their bank branches.
(Total time: 30 minutes)
To Conclude
• Pricing transparency is only one among many
challenges that a bank will face.
• To address the new rules on interest rate
calculations, a multi-stakeholder approach must be
utilized to address this bank-wide issue.
• Support across the organization is essential for
proper execution.
• To differentiate oneself from one’s competitors,
product modifications must be made.
• More importantly, preparation is key to adapting to
these new rules.
• Be ready! Start early! Prepare now!