Protecting Borrowers from the Unscrupulous Lenders


Consultations on setting up new regulations to protect consumers from  unscrupulous lenders.

 

Imagine paying interest rates of between 520 to over 1500 percent over a year on a loan. That’s the unfortunate reality for some Papua New Guineans, who borrow money from unregulated money lenders operating in the country.

A review by Bank of Papua New Guinea and IFC, the International Finance Corporation, a member of the World Bank Group, into financial consumer protection laws, lenders and practices in Papua New Guinea, found a significant proportion of lending to people in the country is by unregulated money lenders. These lenders offer “abusive rates of interest” and can indulge in “extremely aggressive” practices to collect on debts – such as making threats, physical violence against debtors and their families and damage to property.

The review also finds some faults with banks and finance companies operating in the regulated market, citing instances of institutions failing to clearly disclose fees and charges to enable consumers to understand products and make informed decisions.

Some interest rates, fees and penalties seen in the market were cited as unfairly high, with some lenders in the unregulated sector charging interest rates of over 1000 percent per annum. Even the rates charged by the institutions in the regulated sector for personal loans and payday, lending ranged from 30 percent a year or in some cases 3.5 percent a fortnight – adding up to over 90 percent a year. And in many cases, consumers taking out these loans simply didn’t understand or weren’t aware of the rates nor fees they need to pay, so didn’t understand the debt they were incurring.

“The review highlights common practices that could led to significant unfairness for consumers, with new fees imposed without a person’s knowledge and unilateral changes to fees and rates,” said IFC’s Resident Representative in Papua New Guinea, John Vivian.  

It’s findings like these that has prompted the Bank of Papua New Guinea, BPNG, and IFC to develop a comprehensive financial consumer protection framework to bring the practices of finance companies and banks into line with international best practice.

The Governor of BPNG, Loi M. Bakani says the move is consistent with the government of Papua New Guinea’s objective enshrined in the National Financial Inclusion Policy that “all Papua New Guineans are financially competent and have access to a wide range of financial services that address their needs and are provided in a reasonable and sustainable manner.”

The regulatory framework will cover all financial institutions licensed and supervised by BPNG in respect of the financial products and services provided to consumers for either personal or business purposes. BPNG is considering options in the long term for including the unregulated financial institutions.  

Consultations by IFC and BPNG began in early February on the proposed regulatory framework with the aim of ensuring that, in line with internationally accepted principles, consumers taking out loans or other financial products are treated fairly, with transparent disclosure, suitable products, data protection and a decent mechanism for complaints.

The issue of dealing with complaints was one of the areas mentioned in the IFC review, which was undertaken with the support of the Australian and New Zealand governments.  Another example highlighted was the case of people with inactive or dormant deposit accounts. There are no requirements for dealing with those kinds of accounts, so people with an inactive or dormant deposit accounts could find their savings wiped out by fees, or see their balance go into a negative.

In some cases, there are no controls on the charging of excessive collection or expenses on defaults. The review illustrated that several lenders’ terms and conditions include clauses giving them significant latitude.

“Another key issue highlighted in the review is the need to tackle the issue of affordability requirements for loans, given the apparent readiness of some people to take on excessive debt, ”said IFC’s financial sector specialist, Philippa Roberts.

Several institutions reported non- performing personal lending rates of seven to 10 percent; while another said about a quarter of its pending portfolio was overdue by at least 30 days.

 “One of the suggestions we heard in undertaking this review was that the high interest rate environment in Papua New Guinea was, at least in part, due to a lack of adequate disclosure of interest rates,” Roberts said.

Papua New Guinea is developing an extended network of EFTPOS and ATM machines which allow the use of debit cards and a limited number of credit cards. And mobile banking, a move supported by IFC, is also on the rise.

“With new ways opening up to deliver financial services to people, it’s important now to set the right frameworks in place so people can understand the products on offer,” Vivian said.

The full review into financial consumer protection laws, institutions and practices is available here

The draft Financial Consumer Protection Regulation is available for consultation and comments here.

Click here to download the media release.