Published 13 June 2022, The Daily Tribune

The Supreme Court (SC) once again reminds the public in the recent case of Philippine National Bank (PNB) vs AIC Construction Corporation and Spouses Bacani, GR 228904, 13 October 2021, that one cannot charge interest and penalties to unjustly enrich a person at the expense of another.

The PNB case revolves around the interest stipulation and provision in the P10-million credit line of AIC Construction with PNB. The interest provision in the agreement states among others that the Borrowers agree to pay on each Availment from the date of each Availment, up to but not including the date of full payment thereof at the rate per annum which is determined by the Bank to be the Bank’s prime rate plus applicable spread in effect as of the date of the relevant availment. (Emphasis and underscoring ours)

Meanwhile, as security, the spouses Bacani executed a Real Estate Mortgage over parcels of land. The omnibus credit line increased little by little through its term. And when the loan matured in September 1998, the loan amounted to P65 million, with P40 million as principal and P25 million as interest charges capitalized by PNB into principal. PNB stated that the interest rates ranged from 13.532 percent to 24.4 percent. The rates were never fixed and varied monthly. The 24.4 percent interest was imposed only once, from 19 March 1998 to 19 April 1998. From 19 April 1998 to 18 August 1998, the interest rate decreased to 13.532 percent. With the ballooned loan amount, AIC Corporation negotiated for the restructuring of the loan but to no avail. Consequently, PNB foreclosed the mortgage.

Aggrieved, AIC et. al. filed a complaint against PNB et. al. for annulment of interest and penalty increases, accounting, exemption of family home and damages.

The crux of the case is whether the rate of interest is fair and reasonable.

The SC held in the negative stating that monetary interest is always agreed upon by the parties and they are free to stipulate on the rates that will apply to their loans. However, if there is no true parity between the parties, courts may equitably reduce iniquitous or unconscionable interest charges. The freedom to stipulate interest rates is granted under the assumption that the parties are on equal footing and that neither of the parties has a relatively greater bargaining power to command a higher or lower interest rate. It assumes that the parties are equally in control of the interest rate and equally have options to accept or deny the other party’s proposals.

Applying the same in the present case, it was held that it is even more glaring that the stipulations in question no longer provide that the parties shall agree upon the interest rate to be fixed; instead, they are worded in such a way that the borrower shall agree to whatever interest rate the lender fixes.

As a matter of principle, money itself should not beget money. Allowing money to produce more money — for instance, lending money at excessive interest rates as a way of increasing money — lays the foundation for a growing wealth disparity, since loans are usually extended by those who are richer (with capital) to those who are poorer (without capital). This does not serve the demands of social justice.

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