Thursday, March 15, 2007
Philippine Sub Prime Lending
Most Pinoys have never heared of sub prime lending, but you might be more familiar with the term five-six? They are basically the same. Sub prime lending simply means loaning to people who have poor credit histories or cannot prove their incomes due to lack on an Income tax Return (ITR) that makes it virtually impossible for their loan to be approved by a bank or mainstream financial institution.
In the United States and in the United Kingdom, the simplest form of sub prime lending involves doorstep lending, small amounts of cash loaned to people usually on low incomes and then collected from their own home and the sub prime mortgages where people borrow against the increased value of their homes, often to pay off other borrowings.
In the Philippines, major commercial banks and mainstream financial institutions do not lend to people who have a negative credit history usually found in the CMAP, cannot prove their capacity to pay due to lack of proper documents from non declaration of their income taxes. However, there are those who lend to these type of borrowers, usually charging a premium rate of interest due to the risk involved.
These lenders are usually associated with the police and military or knows a lot of politicians, lawyers and judges due to the risk of default payments from their borrowers. These individuals are usually intimidating or use a variety of intimidation tactics making the borrowers afraid in not settling their obligations.
The risk of lending to people with poor credit history is evident by the reaction of the US Stock Market when New Century Financial, a major sub prime lender in the US has had its shares suspended on the New York Stock Exchange amid fears that the firm may be heading for bankruptcy due to a rise in default rates in the sub prime sector and a slowdown in the US housing market coupled with rising US interest rates have also hit the company. These effects are being felt even halfway across the globe in our own Philippine Stock Exchange where most of this years gains were wiped out.