Central Bank of Paraguay provides new rules applicable to interest rates in the Financial System

The Board of Directors of the Central Bank of Paraguay (BCP, by its Spanish acronym) issued Resolution No. 17, Minute No. 63 dated December 22, 2021, whereby it updates the regime to which the entities of the financial system must adjust with respect to interest rates.

The purpose of the resolution is, first, to delimit the scope of the legal concepts applicable to interest rates, then, to establish uniform and mandatory rules on how to calculate them and, finally, to determine the specific ways in which the entities must communicate them to the public.

The regulation begins by regulating the ways in which interest rates may be arranged. It establishes the free arrangement of rates, provided that the effective rates do not exceed usurious rates, in accordance with Art. 44 of Law 489/95. The regulation also establishes basic and conceptual rules on the fixed or variable nature of the rates, the basis for the settlement of interest and the calculation of terms.

Furthermore, it establishes the calculation methodologies and formula for the Annual Nominal Rate (ANR) and the Annual Percentage Rate (APR).

Annual Percentage Rate (APR)

According to the resolution, the compensatory interest rate is that which allows the present value of all installments, discounted amounts, and other payments to be made by the client to be equated with the amount effectively borrowed. For this calculation, all installments must be included, for the amount of principal and interest, in addition to all charges that constitute interest rate.

For the interest rate calculations, “Charges that constitute interest” and “Charges authorized on behalf of the client that do not constitute an interest rate” are considered.

The first group includes, in general, all costs related to credit management, such as, but not limited to: expenses for commercial and credit reports, address verification, internal processing, analysis and approval expenses, approval fees, postage, among others. It is expressly established that any amount resulting from the difference between the amount charged to the client and the cost actually paid to, or received by, the institution from third party service providers must be computed and published as part of the interest. In this regard, the resolution also states that costs that are not expressly contemplated in the list of categories and denominations of fees approved by the BCP, or that are not in accordance with BCP regulations, may not be passed on to the client and must be included in the calculation of the internal rate of return (IRR), without prejudice to any penalties that may be applicable.

In the second group are those charges which, in accordance with BCP regulations, without being an express or implicit condition of the institution for the granting of credit, are authorized and agreed to in advance by the client in exchange for products or services effectively rendered by the institution or third parties, such as: management of guarantees, credit insurance and taxes, commissions or expenses for supplementary services or additional or complementary services to the financial operations contracted, etc.

Annual Percentage Rate (APR)

On the other hand, the resolution defines the Annual Percentage Rate (APR) as the rate that effectively produces the money (capital). The effective rates take into consideration the interest collection regimes, regardless of the amount of capital and the term agreed for the term of the active or passive operation. The effective annual rate may be equal to or different from the nominal annual rate, depending on the conditions agreed for the payment period.

Finally, the way interest rates, commissions and expenses applicable to both lending and borrowing transactions of the financial system must be offered to the public in a uniform manner is established. In this sense, rules are established for the physical and electronic means of their publication, as well as rules on the form of displaying them in the price lists and the form of including them in the documents with clients.

The spirit of the regulation is to take a further step in the BCP’s policy of seeking that customers of the financial system may be clearly and fully informed about the rates, commissions and fees charged by each entity to choose the most convenient offer and thus promote free competition among the different entities. It is with this in mind that more rigorous standardization and transparency mechanisms are implemented to facilitate this task for both consumers and the regulator.

The normative overrides Resolutions No. 2 and 3, Minute No. 123 dated November 15, 2001, and Resolution No. 2, Minute No. 72 dated November 7, 2007, all issued by the BCP’s Board of Directors.