25 March 1988
Reuters News
English
(c) 1988 Reuters Limited 

MANILA, March 25, Reuter – Philippine banks have largely recovered from years of crisis, but high intermediation costs still constrain lending, bankers and analysts say. 

The industry’s total assets grew to 259.9 billion pesos at end-1987 from 236.4 billion a year earlier, according to a study by the state-owned Philippine National Bank (PNB). Profits at the country’s 29 banks have improved, said Bankers’ Association of the Philippines President Manuel Morales. 

The situation is dramatically different from 1983, when Benigno Aquino’s assassination triggered economic collapse. 

Commercial banks were ordered to deposit 24 pct of their loanable funds with the Central Bank to tackle a rash of bank closures and a liquidity crisis. 

The reserve ratio has slowly been reduced to 21 pct. But the requirement continues to seriously constrain private sector credit, adding to the intermediation costs of converting depositors’ money into bank investments. 

“Reserve requirement regulations are responsible for a significant portion of the costs of intermediation,” said a recent World Bank study on the Philippines. It called for a lowering of reserve requirements to the 1982 level of 18 pct. 

The World Bank noted that spreads between deposit and lending rates are extremely high in the Philippines. 

Real savings deposit rates stood at a negative 3.376 pct in December 1987, compared to a positive 8.316 pct a year earlier. Real lending rates on secured loans stood at 8.860 pct in December, against 17.048 pct a year earlier. 

Bankers’ Association president Morales said other factors increasing intermediation costs are a five pct gross receipts tax and an “agri-agra” regulation under which banks must allocate 25 pct of their net loanable funds for agricultural loans and the government’s agrarian reform program. 

“Since we can’t do this (fulfill the agri-agra requirement) as fast as our deposits increase, we are reduced to buying government paper that will be qualified substitutes,” Morales said. “This paper pays less.” 

The world Bank said the yield on government agri-agra securities has been consistently lower than on alternative assets, sometimes even lower than the banks’ cost of funds. 

“The repeal of the agri-agra requirement would help reduce lending rates without affecting the volume of loans going to agriculture,” the World Bank said. 

“Policy decisions that favour deregulation, competition, market orientation, and that strive to develop ever increasing efficiency in the process of intermediation will be made,” Central Bank Governor Jose Fernandez said. “Monetary policy will seek to provide positive rates to savers and by so doing expand the flow of savings.” 

He noted recently that a long downtrend in the banking system’s private domestic credits had bottomed out in 1986. 

Central Bank figures show net domestic credits of the commercial banking system expanded by over 20 pct to 130.14 billion pesos at end-1987 from 108. 31 billion at end-1986. 

The banking system’s loan portfolio expanded by 22.3 pct last year, compared to a 21.8 pct contraction in 1986. 

At end-1987, total loans stood at 115.7 billion pesos, up from 94.5 billion a year earlier. Deposits rose to 153.5 billion pesos from 135.3 billion at end-1986. 

Morales said the industry had recovered quickly from the shock of the closure of Manila Banking Corp, one of the country’s ten largest banks, in May last year. The Central Bank said the bank was overdrawn to a total of 6.1 billion pesos, declared it insolvent, and placed it under receivership.