‘NEITHER A BORROWER, NOR A LENDER BE …’
Shakespeare’s advice falls on deaf ears nowadays when debit and credit cards and bank accounts are part of daily life. Interest is part of life, too, and bankers are forever asked questions like “Why do I earn less than one percent on my deposit, but am charged seven percent or more when I borrow?”
Actually, banks are between a rock and a hard place.
When a bank lends, it usually does so for a fixed period—six months, one year, whatever. On the other hand, depositors expect to be able to withdraw their money whenever they please.
It would be great if a day’s loan collections and deposits were to at least equal the same day’s loan releases and deposit withdrawals. That does not always happen and banks maintain a cash cushion in case outflows exceed receipts. The cash cushion is in the form of deposits with the Bangko Sentral ng Pilipinas (BSP) and cash on hand, both non-interest earning. Funds with the BSP and on hand could reach to about 25 percent or more of a bank’s deposits:
• The BSP requires that 20 percent of current, savings, and time deposits be set aside and deposited with the BSP.
• Banks remit payments to each other in the course of normal business. When an account holder of Bank A pays his supplier with his check and the supplier deposits the check to his account at Bank B, Bank A has to pay Bank B. Such interbank transactions are done through demand deposit accounts with the BSP.
• Banks keep bills and coins in their vaults and in ATM machines to meet withdrawals and operating expenses.
Banks are also required to lend to priority sectors: (a) 25 percent of loanable funds are set aside for agriculture, of which 10 percent is for agrarian reform beneficiaries; and (b) 10 percent of loans excluding agricultural loans and certain other items are set aside for small and medium industries, two percent for the former and eight percent for the latter.
Borrowers get into trouble and banks make mistakes, leading to uncollectible loans. Understandably, the BSP pays close attention to bank lendings in the exercise of its duty to maintain a strong financial system. Depending on borrowers’ payment records, BSP examiners could conclude that a particular loan is current or otherwise. The bank would then be asked to write off or to provide a loss reserve on noncurrent loans, ranging from 100 percent for loss accounts, to 25 percent for substandard unsecured accounts, and five percent for specially mentioned accounts.
In sum, banks pay interest on deposits received, but can lend and earn interest only on three-fourths or less of it. They need to provide a reserve for probable loan losses; pay staff, utilities, space, and other operating expenses; and leave enough for a reasonable return on stockholder investment. Net interest earnings from deposits and loans are usually not enough. It’s to help prevent Shakespeare’s wrap-up “…For loan oft loses both itself and friend” that banks are in insurance, securities trading, credit cards, funds management, and other lines.
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