BSP extends zero spread on bank rediscount loans

The Bangko Sentral ng Pilipinas (BSP) has extended anew the zero spread on its peso rediscount loans until the end of September to entice more banks to tap the facility to meet their temporary liquidity needs.

The central bank’s Monetary Board issued a resolution on July 9 approving the extension of the reduction of the term spread on peso rediscounting loans to zero by an additional 75 days or until Sept. 30 as part of measures aimed at providing the needed liquidity to banks for purposes of maintaining price and financial stability amid the global health crisis.

BSP first approved the temporary reduction in the spread on peso rediscounting loans usually used for capital asset expenditures, permanent working capital, among others relative to the central bank’s overnight lending rate to zero initially from March 20 to May 19 but was extended for another 60 days or until July 17.

Rediscounting is a BSP credit facility extended to qualified banks with active rediscounting lines to meet their temporary liquidity needs by refinancing the loans they extend to their clients using the eligible papers of its end-user borrowers.

During the height of the enhanced community quarantine implemented in the middle of March, more banks tapped the facility as the spread was reduced to zero. The peso rediscount rates are usually based on the latest BSP overnight lending rate plus a spread depending on the term of the loan.

The Monetary Board has so far slashed interest rates by 175 basis points including the surprise 50 basis points cut last June 25 in anticipation of a more disruptive impact of the COVID-19 pandemic. This brought the overnight reverse repurchase rate to an all-time low of 2.25 basis points.

With the zero spread, eligible rediscount loans are only charged the overnight lending rate of 2.75 percent.

In the first half of the year, data from the central bank showed total availments under the peso rediscount facility reached P20.7 billion, about 81 percent lower versus the P107.65 billion recorded in the same period last year.

However, banks only tapped the peso rediscounting facility for the months of March and April this year especially as the COVID-19 measures adopted by the BSP unleashed much needed liquidity into the financial system.

Aside from the series of interest rate cuts, the BSP has also lowered the reserve requirement ratio for big banks by 200 basis points, entered into a P300 billion repurchase agreement with the Bureau of Treasury, suspended the term deposit facility auction, lowered the volume of the overnight deposit facility, among others releasing about P1.3 trillion into the financial system.

Loans from the peso rediscount window of the central bank jumped 71 percent to a record high of P122.17 billion last year from P71.52 billion in 2018.

Likewise, BSP also announced that the Monetary Board also approved the reduction of the spread under the exporters’ dollar and yen rediscount facility (EDYRF) to the 90-day London interbank offered rate plus 200 basis points, regardless of maturity until Sept. 30.

This brought the rediscount rates for loans under the EDYRF at 2.30788 percent for US dollar and 1.95617 percent for Japanese yen, regardless of loan maturity.

The BSP said the decision on the rediscount rates is still in line with its accommodative stance to further ease the cost of borrowing and ensure ample credit and liquidity in the financial system as the economy transitions toward recovery after shifting to a general community quarantine last June 1.