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A chance to boost inclusive lending after banks reserve cut

May 25, 2019

THE Bangko Sentral ng Pilipinas (BSP) this week announced that it has reduced the reserve requirement ratio (RRR) for small banks, freeing up billions of pesos in reserve funds. One obvious priority where that extra liquidity should go is toward widening the scope of financial inclusion — or lending to small businesses and farmers — that forms part of the government’s socioeconomic targets.

The reserve rate, or RRR, is the proportion of deposits that banks must keep in reserve against their loanable funds. This rate serves as a measure of security against bad loans, but more importantly, it is used as a tool to manage inflation — which does not only involve the movement of consumer prices but also the amount of money circulating in the broad financial system.

By adjusting the reserve ratio up or down, the BSP can, along with its other monetary policy tools, control the amount of money available in the financial system.

During the brief tenure of the late Nestor Espenilla Jr. as BSP governor, the central bank adopted a strategy of gradually reducing the RRR and relying more on its other tools, such as interest rate adjustments, to keep inflation under control. The latest round of RRR cuts is, thus, a planned step in that process.

The rationale for the strategy is that since the RRR has the smallest effect on inflation among the various liquidity management options available, it could be safely cut in order to give banks more funds to loan to more customers, particularly those who have had limited access to credit — individual entrepreneurs, micro and small enterprises and farmers.

Unfortunately, the gradual RRR reduction strategy has so far not quite worked out as planned. Despite mandates to set aside a percentage of their loanable funds for small businesses and agricultural lending, banks continually miss the targets. For example, data released last month revealed that despite a mandate to reserve 10 percent of their funds for micro, small and medium enterprises (MSMEs), banks were only lending a bit more than 7 percent of their funds to these borrowers.

From the banks’ perspective, paying penalties for missing mandated targets is considered less of a cost than the potential defaults of these riskier loans, and the penalties can easily be compensated for by the earnings from loans in the more lucrative consumer, real estate and large business sectors.

The RRR cuts announced this week apply to thrift, savings, rural and cooperative banks, and will be applied in steps over the next three months. It is estimated that the cuts will add an additional P20 billion to the financial system between now and the end of July. A 2.0-percent cut in the RRR to 16 percent from 18 percent announced last week for large banks is expected to add about P190 billion in liquidity.

MSMEs make up 99 percent of all business establishments in the country. The agriculture sector comprises more than 30 percent of the country’s total workforce. That combined P210 billion in newly available loanable funds would generate several times that level in agricultural and small business productivity, new jobs and personal incomes, and increased business and consumer spending if that amount was applied correctly to these areas.

To ensure that it is, the BSP should perhaps consider more aggressive tactics to ensure banks’ compliance with the lending mandates, which, after all, are not mere banking regulations but spelled out in law.

For example, instead of levying fixed penalties on banks that miss the targets, the central bank could adjust the RRR on an individual basis, increasing an erring bank’s RRR by an amount equal to its deviation from the mandated lending percentage. Other means to encourage banks to comply with the standards may also be available.

In this way, the BSP can better support the strategy of the country’s economic policymakers and help to achieve financial inclusion in a substantial way.

Credit belongs to : www.manilatimes.net

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