How un(under)served Filipinos can get into debt


By Ana Olivia A. Tirona, Searcher

KAMILA O. PARAS, a 59-year-old local government worker, was one of the few Filipinas who had cold feet when it came to credit.

About five years ago, Ms Paras was considering buying a house and land with her 61-year-old husband, but couldn’t swallow the ‘hard pill’ that is credit score. The couple wanted to buy their own home after years of renting, but the difficulties of requirements and regulations overwhelmed the couple.

They were asked about their credit score after finding the perfect home. However, neither of them was sure of his credit rating.

“I think my credit card helps me somehow, which I didn’t get until later in life. But I don’t use it often like some people do. J “I’ve had experiences where I didn’t pay on time. Sometimes I don’t push the purchase because it’s quite expensive to pay back later,” Ms. Paras said in an interview.

“The thought of outang at a bank is just scary. So I don’t know what my credit looks like,” she said.

“It’s such a worry to take out loans, so it’s been a difficult time for us. Many things need to be considered. Stable borrowing rate and income. We didn’t push through with this house anymore, it just seemed like a lot of work and just the thought of the credit rating put us off a bit,” Ms Paras added.

With this in mind, how can underserved and unserved Filipinos navigate through opportunities to gain credit and go into debt without fear?

In the Bangko Sentral ng Pilipinas (BSP) National Strategy for Financial Inclusion 2022-2028, the underserved and unserved segments of the country are part of the Ifnancially excluded people whom the central bank wishes to address in its seven-year plan.

PASB has identified that the underserved and unserved are the elderly, migrant workers, people with disabilities, indigenous peoples, forcibly displaced people, those 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 with formal credit fell from 19% in 2019 to 25%. However, banks remain the least preferred source of formal credit, but still the main source of formal credit. savings at 31% and second place in account penetration at 23%.

Furthermore, the survey showed that half of Filipinos think it is difficult to borrow from formal institutions. Unfortunately, the common perception is that the greater the need for borrowing, the more reluctant they are.

It is vital for BSP to continue to expand its financial inclusion for credit opportunities. Examples of their initiatives are to promote the use of alternative data (e.g. data mined from social media, mobile data, utility data, behavioral data, online transactions, geolocation data and browser data, among others, typically not collected by financial institutions, etc.) and develop a better framework for leveraging data for credit reporting for those working in agriculture and MSMEs.

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

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

Before we dive into possible credit earning opportunities for Filipino consumers, what is credit and credit score?

In simpler terms, credit is when a consumer purchases a speciIfc good or service without immediate payment. But will pay the lender – like a bank – what is due at a later date.

Meanwhile, a credit score is a report on how well a borrower has paid off their debt. Having a good credit rating will allow you to have more access to loans and Iffinancial services.

For consumers like Mrs. Paras and her husband, their journey with credit is unstable because they believe debt is synonymous with evil. So when the time came for them to report a credit score, they felt discouraged.

In a written response to Business worldPia L. Arellano, President and Regional CEO of TransUnion Philippines, describes the credit as helping Filipino consumers access Iffinancial products and services.

“Good credit is essential as it will allow Filipinos to access loans and credit cards to help them achieve their financial goals. Apart from this, Filipino consumers can also avail credit for online shopping, purchase protection, Iffinancial security, and even to maintain their own business,” Ms. Arellano said.

“Whether people realize it or not, credit score really plays a big role when it comes to your own personal finances. Credit scores are the lender’s basis for deciding if you are a good risk. They take them as evidence of the likelihood of you paying off your debt,” Ms Arellano added.

The TransUnion Credit Study, which surveyed 11,100 adults (ages 18 and older), showed that unserved and underserved Filipinos “expect their need for credit” to increase over the next three years. Iffive years.

The most common reason why respondents did not want credit or had more is that they “do not want to go into debt”. About 40% of underserved Filipinos surveyed said they feared not having control over Iffunding. For example, 32% of the underserved explained how they would benefit from credit if only it had lower weekly and monthly payments.

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

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

The primary goal of BDO Unibank, Inc. (BDO) for the unserved and underserved segments of the population is to have better access to credit.

In a written response to Business worldBDO assures that consumers can benefit from debt in several ways:

• Increase liquidity to finance basic needs, spend on renovation or repair of the house or vehicles; pay unforeseen expenses; or finance working capital to start or expand a business.

• Manage cash flow for things like paying tuition.

• Buy big-ticket items like a house and land or a vehicle sooner.

• Repay debts with new funds (refinancing) on ​​terms that may be more favorable to them (eg longer payment terms or installment systems).

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 that targets consumers in remote areas of the Philippines.

“To meet the banking needs of under-served markets, particularly in rural areas, our rural banking subsidiary, BDO NB, offers payday loans and Kabuhayan loans,” the bank said.

BDO NB payday loans are classified as personal loans that can be used for various needs. This offer involves a more convenient way to pay off debt through payroll deductions.

Similarly, the Kabuhayan loan is for MSMEs to provide financial support to those who develop and expand their businesses. Specifically, it can be used for purposes such as working capital or the acquisition of fixed assets.

However, affordability can always come at a cost.

“The bank could face a potential decline in asset quality or an increase in non-performing loans (NPLs) on unsecured loans,” BDO said.

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

For people like Ms. Paras who struggle with credit, debt should be easy, affordable and convenient.

Despite financial uncertainty and rising global prices, banks like BDO assure their consumers that access to credit is “more important to the underserved 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 actively engage with the credit system and promoting greater financial inclusion. With this, it can be said that consumer experience plays a significant role in why unserved and underserved consumers are hesitant or less likely to accept an offer of credit,” Ms. Arellano said.

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

There will always be factors for both borrower and lender to weigh as long as access is not limited to those who are financially strong.

“Maybe in the long run we can Iffinally present a good credit score to buy our dream house. Otherwise, fine,” Ms. Paras said. “Wherever it’s simple and hopefully affordable, I’ll choose that.”