Bank lending growth hinges on recovery, vaccine rollout

MANILA, Philippines — The reversal of the continued drop in loan disbursements by big banks hinges on faster recovery from the pandemic-induced recession and the rollout of COVID-19 vaccines, according to Bangko Sentral ng Pilipinas (BSP) Governor Benjamin Diokno.

Diokno said lending by universal and commercial banks remained weak due to bank risk aversion and uncertainty brought about by the impact of the pandemic.

“The improvement in bank lending activity in the months ahead will largely depend on the pace of economic recovery as a whole, which in turn would be determined crucially by the progress in the vaccine rollout,” the BSP chief said.

Latest data from the central bank showed loan disbursements by big banks contracted by five percent to P8.99 trillion in April from P9.47 trillion in the same month last year.

Bank lending declined for the fifth straight month in April as the resurgence of COVID-19 cases constrained domestic economic activity and continued to dampen market sentiment.

The decline in April was faster than the 4.5 percent contraction recorded in March and the biggest decline in nearly 22 years or since shrinking 7.2 percent in June 1999.

“While domestic interest rates have gradually declined, bank lending activity has been slow to adjust due to banks’ risk aversion and weak loan demand,” Diokno said.

As part of its COVID-19 response measures last year, the BSP slashed interest rates by 200 basis points, bringing the overnight reverse repurchase rate to an all-time low of two percent.

It also lowered the reserve requirement ratio to release more liquidity into the financial system to boost the economy.

In all, the response measures released P2.2 trillion into the financial system.

“Liquidity remains ample while domestic interest rates have declined to support bank lending activity,” Diokno said.

The BSP chief said fiscal and monetary support would continue to underpin the prospects for sustained recovery.

“Fiscal policy, in particular, remains crucial in providing direct support to revive domestic demand and prevent long-term economic scarring from the pandemic, with the BSP remaining ready to implement further policy measures if necessary,” he said.

For his part, ING Bank senior economist Nicholas Mapa said the Dutch financial giant is expecting rates to stay anchored at two percent at least until June next year as the BSP is attempting to do what is best for the economy.

“BSP has telegraphed a long pause, and we expect rates to stay anchored at two percent until at least June of 2022, to give the Philippine economy enough juice to get out of its own funk,” Mapa said.

Mapa said the notion that a preemptive move is needed to prepare for a rate hike a year and a half down the line may not work in the best interest of the economy as this may translate to BSP hitting the brakes just when we get the car inching forward.

“This could leave us susceptible to being the only car left on the track, wobbling further as all others zoom past us on the road to economic recovery,” Mapa said as the BSP has indicated that it is carefully crafting its own exit strategy that would be most beneficial to the economy.