BSP mulls alternative lending benchmark
The Bangko Sentral ng Pilipinas (BSP) is looking into the viability of the proposal of banks operating in the country for an alternative benchmark in the pricing of their loans due to the ongoing low interest rate regime.
BSP Governor Amando Tetangco Jr. said recently that the bank regulator is now studying several alternative benchmark for lending rates as being proposed by the Bankers Association of the Philippines (BAP).
Tetangco pointed out that bankers believe that the yield of the benchmark 91-day treasury bills (T-bills) is no longer appropriate in the pricing of their loans.
“The treasury bill rate is no longer reflective and no longer appropriate for a benchmark so we are looking for an alternative right now,” he stressed.
The three-month debt paper fetched 2.383 percent during the latest auction at the Bureau of Treasury. The benchmark T-bill, used by banks in pricing their loans, even fell to an all-time low of 0.68 percent in April 18 of last year.
The BAP submitted a proposal to the BSP seeking to peg the lending rates to the overnight borrowing rate as the yield of the 91-day T-bills is sometime lower than the deposit rate.
Tetangco said the bank regulator is now looking at the proposal from the BSP and is reviewing previous studies pertaining to the lending rate. The lending rate stood at 6.518 percent as of March 9.
“These will have to be discussed. The benchmark that we will be coming up with should be market-based price,” the BSP chief stressed.
The BSP’S past experience with rate-setting made apparent the limitations of an administratively fixed interest rate prompting the central bank to shift to a market-oriented interest rate policy allowing the market to set its own rates in 1983.
The BSP only sets rates for the BSP’S overnight borrowing and lending facility to influence the timing, cost and availability of money and credit, for the purpose of stabilizing the price level.
It warned that the reimposition of rate ceilings or limits on the spread between the T-bill rate and lending rate would only introduce distortions in the credit market.
After the Asian crisis in 1997, the BAP decided to implement a gentleman’s agreement to maintain a cap on the spread of bank lending rate of up to a maximum of five percent over the 91-day T-bill rate in the secondary market.
A review of the spread between the average monthly bank lending rate charged by commercial banks and the 91-day T-bill rate showed that banks are generally in compliance with the 500-basis point cap.
The BSP has so far slashed interest rates by 50 basis points this year, bringing the overnight borrowing rate to a record low of four percent and the overnight lending rate to six percent due to benign inflation outlook and slower than expected global economic growth.
Latest data showed that loans extended by universal and commercial banks grew at a broadly steady pace posting a double-digit growth rate of 19.1 percent to P2.757 trillion as of end-january from P2.315 trillion as of end-january last year amid the sovereign debt crisis in Europe and the economic uncertainties in advanced economies led by the US.