Legality of Loan Interest Charges During the Bayanihan Grace Periods (Philippine Perspective)
1. Context and Why It Matters
When COVID-19 immobilised the Philippine economy, Congress responded with two emergency statutes—the Bayanihan to Heal as One Act (Republic Act No. 11469, “Bayanihan 1”) and the Bayanihan to Recover as One Act (RA 11494, “Bayanihan 2”). Each statute compelled every bank, quasi-bank, financing or lending company, micro-finance NGO, cooperative, and other credit-granting entity to grant an automatic payment moratorium (30 days under Bayanihan 1; 60 days under Bayanihan 2).
A recurring point of confusion was whether interest could still be charged during those “grace periods,” and—if so—what kind of interest. The answer sits at the intersection of the Bayanihan laws, their implementing rules, Bangko Sentral ng Pilipinas (BSP) memoranda, the Civil Code, and the Constitution’s non-impairment clause.
2. Statutory Foundation
| Statute | Grace Period | Key Section | Expiry |
|---|---|---|---|
| RA 11469 (Bayanihan 1) • signed 23 Mar 2020 | 30 days per due date for amounts falling due 17 Mar – 31 May 2020 (the ECQ window) | §4(aa) | 25 Jun 2020 |
| RA 11494 (Bayanihan 2) • signed 11 Sep 2020 | One-time 60-day grace for loans existing as of 15 Sep 2020 and falling due up to 31 Dec 2020 | §4(uu) | 30 Jun 2021 |
Both sections contain almost identical language: creditors “shall implement a grace period” during which no “additional interest, penalties, fees, or other charges” may be collected.
3. Implementing & Supervisory Regulations
| Regulator | Instrument | Salient Points |
|---|---|---|
| BSP | Memorandum M-2020-042 (6 Apr 2020) • Circular No. 1080 | – Spell-out that the 30-day grace is automatic and recurs for each due date inside the ECQ window. – Interest on principal may accrue, but interest-on-interest may not. – Borrower may pay accrued interest “on staggered basis” without penalties. |
| BSP | Memorandum M-2020-068 (21 Sep 2020) | Implements Bayanihan 2’s 60-day grace; again outlaws any additional interest, penalties, or “other fees.” |
| SEC (for financing/lending cos.) | SECMemorandum Circular 28-2020 | Mirrors BSP rules; prescribes refund or credit‐back within 30 days for illegal charges. |
| CDA, IC, DTI | Various circulars | Apply same discipline to cooperatives, insurers issuing premium loans, and informal lenders. |
Key regulatory mantra: “A regular—that is, contractual—interest on principal may continue to accrue; but lenders may not compound it, nor slap new fees, penalties, or ‘interest on interest.’”
4. Dissecting “Interest” vs. “Interest-on-Interest”
- Contractual or Nominal Interest – the agreed price of money applied only on outstanding principal.
- Accrued Interest – unpaid nominal interest that piles up because payment is deferred. Allowed.
- Interest-on-Interest / Compounded Interest – charging interest on the accrued interest itself. Prohibited by the Bayanihan Acts and by Article 1959 of the Civil Code (which disallows compounding absent an express agreement and, here, a statute specifically bars it).
- Penalties, Late-payment Fees, Service Charges – expressly suspended by §4(aa)/(uu).
Thus, during the grace period:
Outstanding Principal ▶ Still earns agreed interest rate (legal)
Accrued Interest ▶ May be collected later but must NOT itself earn interest (legal if uncompounded)
Any add-on ▶ Flatly illegal (prohibited)5. Civil-Law & Constitutional Overlay
| Source | Relevance |
|---|---|
| Civil Code Art. 1956 | Interest requires written stipulation—unchanged. |
| Civil Code Art. 1959 | Prohibits interest-on-interest unless agreed and due; Bayanihan over‐rides even an agreement. |
| Civil Code Art. 1176 / 1253 | Allocation of payments: grace period does not disturb default rules once collection resumes. |
| Usury Law (Act 2655) & BSP Cir. 905-82 | Still no numerical ceiling; Bayanihan limits are qualitative (no compounding). |
| Const. Art. III §10 (Non-impairment) | Bayanihan is police power legislation in a public emergency; temporary impairment is valid (see Ichong v. Hernandez, Pangasinan Trans. doctrine). |
6. Administrative & Civil Liability for Non-Compliance
| Forum | Possible Sanctions |
|---|---|
| BSP (banks, credit cards, quasi-banks) | Monetary penalties up to ₱30,000 per violation plus daily fines; suspension of officers; revocation of license. |
| SEC (financing/lending cos.) | Fines up to ₱2 million, cease-and-desist, revocation of CA. |
| DTI (consumer lenders) | Administrative fines under RA 7394. |
| Borrower Civil Action | Recovery of illegally collected interest or charges, damages, attorney’s fees. |
| Financial Consumer Protection Act (RA 11765, effective 2023) | Now adds stronger refund & disgorgement remedies, but violations during 2020–2021 are still actionable under its transitional clause. |
7. Borrower Remedies & Enforcement Path
- Demand Letter to creditor citing RA 11469/11494 and the relevant circular.
- Internal Complaints Mechanism (BSP’s or SEC’s mandated consumer assistance desks) – 15 banking days to resolve.
- Regulator Complaint – BSP Consumer Protection and Market Conduct Office; SEC Enforcement and Investor Protection Dept.; CDA or IC as applicable.
- Civil Suit – action for sum of money / refund; or special civil action for declaratory relief if the issue is purely legal.
- Class or Test Case – no Supreme Court ruling yet (as of 31 May 2025), but several petitions have reached trial courts; regulators have so far preferred supervisory enforcement over litigation.
8. Common Compliance Configurations Observed
| Method Adopted by Lenders | Is It Lawful? | Notes |
|---|---|---|
| Extend maturity by 30/60 days without re-pricing | ✔ | Widely used for amortizing loans. |
| Add accrued interest as a balloon payment at final maturity | ✔ | Must be interest-free; disclose amortized schedule. |
| Re-amortize entire loan (principal + accrued interest) over remaining term | ✔ | Provided the accrued interest is not itself made to earn interest. |
| Collect a “processing fee” for adjusting the schedule | ✖ | Squarely prohibited. |
| Apply normal late-payment charge because borrower still paid after grace period | ✖ for the grace period portion; ✔ once grace lapses. | |
| Capitalise accrued interest and apply the same rate on it | ✖ | Classic “interest-on-interest.” |
9. Frequently Misunderstood Points
| Misconception | Clarification |
|---|---|
| “No interest at all may run.” | Only additional charges are barred; nominal interest on principal still accrues unless creditor voluntarily waives it. |
| “Grace period is optional; borrower must apply.” | Both laws make it automatic; application-based systems violate the statutes. |
| “Micro-finance loans are exempt.” | Bayanihan 2 even extends grace to all existing loans, including micro-finance, and mandates a longer 90-day moratorium for micro-finance NGO loans. |
| “The Acts expired, so an illegal charge is now cured.” | Expiry ends prospective obligations but does not legalise past violations; refunds remain demandable. |
10. After Bayanihan: Continuing Relevance
Although both statutes have sunset, their effects linger:
- Accrued Interest Buckets – still being paid off in 2025 for long-term mortgages.
- Regulatory Exams – BSP and SEC examiners review Bayanihan compliance as part of their post-COVID “lessons learned” audits; penalties are still being assessed.
- Financial Consumer Protection Act (2023) – codifies many Bayanihan protective concepts (cool-off periods, no penalty during calamity, disallowing unfair interest practices) and will colour any future pandemic response.
11. Practical Checklist for Compliance Officers
- Identify all loans with due dates 17 Mar–31 May 2020 (Bayanihan 1) and 15 Sep–31 Dec 2020 (Bayanihan 2).
- Verify that only principal interest accrued; no compounding, no penalties.
- Issue refunds/credits within 30 days of discovery; document consumer consent for any re-amortisation.
- Report breaches to BSP/SEC under the “single event reporting” regime.
- Update loan management systems to flag any emergency‐period moratoria enacted by future laws (BSP requires a toggle field).
12. Conclusion
During the Bayanihan grace periods, interest on the principal could legally continue to run, but absolutely nothing could be added on top of that interest—no surcharges, no late fees, and most importantly, no interest-on-interest. Creditors who went beyond that boundary exposed themselves to administrative fines, reputational damage, and refund liability. The episode is now a playbook case on how Philippine police-power legislation can validly cut across private contracts in times of national emergency—and why every lender must design its systems to adapt overnight when Congress says so.
This article is for informational purposes only and does not constitute legal advice. For case-specific guidance, consult Philippine counsel or the appropriate regulator.