Significant drop in loan rates cited

By Prinz P. Magtulis, The Philippine Star

Posted at Aug 22 2012 10:21 AM | Updated as of Aug 22 2012 06:21 PM

MANILA, Philippines - Bank lending rates have dropped significantly over nearly a decade, freeing up more resources for loans but at the same time trimming possible profits of lenders as a central bank official called on the government to provide banks more avenues for investment.

Average real interest rates decreased to a high of 4.89 percent and a low of 2.61 percent from their 2003 levels of 7.25 percent and 5.42 percent, respectively, data from the Bangko Sentral ng Pilipinas (BSP) showed.

Real interest rates are computed by dividing average lending rates against expected inflation rate. This indicator, BSP said, factors in the erosion of the value of money a bank or an investor will earn in the future due to-rise in prices.

Despite the drop, BSP deputy governor Diwa Guiniguindo told reporters on Friday, “Interest rates remain in favor of the Philippines that is why investments are going here. We are awash with funds.”

BSP’s policy-making Monetary Board has cut key rates by an aggregate of 75 basis points this year to new record-lows of 3.75 percent and 5.75 percent for overnight borrowing and lending, respectively. Rates however remained higher than near-zero rates in developed markets, making the Philippines attractive to foreign inflows seeking higher returns.

For local banks however, interest rates dipping since 2003 is not good news as this means lending out their money now to consumers will give them lower returns than if they were lent out nine years ago.

Guinigundo said banks have no choice. “In a competitive market, interest spread will relatively be completely low,” he said.

 “While it is an important concern (that banks may be earning less due to lower interest rates), monetary policy is something you induced on the basis of monetary policy stability,” he added.

To cope with the low interest rate environment, Guinigundo said the government could help the banks by amending the law or providing more investment channels.

He pointed to Republic Act Nos. 9501 and 1000, which mandate banks to allocate portions of their total loan portfolio to micro, small and medium enterprises and to the agriculture sector.

 “Instead of being able to lend this out, they (banks) are required to set aside these amounts. The problem, what if nobody avail them? Then money gets stuck with the banks and they are not able to lend them,” Guinigundo said.