The central bank’s guidelines on the establishment of digital banks is expected to be approved this month, according to a Bangko Sentral ng Pilipinas (BSP) official.
BSP Deputy Governor Chuchi G. Fonacier said the circular will be submitted to the Monetary Board in the next few weeks. The draft circular which has been released to the banking community for comments amid the COVID-19 outbreak is on its final review and analysis.
“The circular on digital banking is not yet approved, we’re still in the process of evaluating the comments received from external stakeholders. But, we’re targeting submission to the Monetary Board within this September,” said Fonacier.
Based on the draft circular, the BSP may subject a digital bank to higher minimum capital requirement and capital ratio based on its assessment of the risk profile and market reach of the digital bank, but the proposed minimum capitalization is P400 million for a basic digital bank and P900 million for an advance digital bank. The difference between the two is that an advance digital bank is allowed to cater to the large enterprises while a basic digital bank is limited to micro, small and medium enterprises (MSMEs). An advance digital bank can also issue credit cards and other activities approved by the BSP.
“We believe the regulations for digital banks are intended to foster financial inclusion by lowering barriers to entry. Less onerous capital requirements in initial years will likely make inclusive finance more viable and promote faster growth in underserved regions,” S&P Global Ratings said in a September 10 report, “Philippine Banks On The Cusp Of A Digital Revolution”.
“Notably, a Philippine digital bank needs only P900 million of paid-up capital. This contrasts with the minimum paid-up capital requirement for a universal or commercial bank in the Philippines, which could be anywhere between P2 billion and P20 billion, depending on size of the branch network. By reference, the minimum capital requirement for a full digital bank in Singapore is S$1.5 billion (P53 billion),” said S&P Global.
“Unlike markets such as Singapore, where digital banks operate on a level regulatory playing field with the incumbents, the central bank will likely give the digital banks in Philippines several years to meet minimum capital and liquidity requirements,” the credit watcher added.
S&P Global said digital banks may take three to five years to become profitable, as “they scale up in markets largely ignored by the big lenders.”
“We believe BSP could follow a phased implementation of digital banks, giving them some lead time before bringing regulations on par with the universal and commercial banks,” the report said.
As domestic corporations, a foreign individual or non-bank corporations could set up a digital bank but ownership will not exceed 40 percent of voting stock. However foreign banks that are qualified by the BSP could control up to 100 percent of a digital bank’s voting stock.
The BSP describes digital banks as a basic bank or an advance digital bank offering financial products and services through a digital platform or electronic channels and not allowed to put up a branch or branch-lite unit.
Basic digital banks will have MSMEs as clients and will accept deposits such as savings, time deposits and foreign currency deposits. They can grant unsecured loans, collect and pay for the account of others, provide remittance and bills payment services and issue electronic money products. An advance digital bank can perform all of the basic digital bank services to retail customers, MSMEs, and plus large enterprises or other corporate clients.
“The traditional banking sector primarily lends to large conglomerates and the mass affluent, leaving the market for small-ticket, unsecured lending open to digital entrants. We expect traditional and digital banks to coexist, serving different segments of the economy,” said S&P Global in the report.
S&P Global noted that local banks’ lending to MSMEs have declined to a low of seven percent of total loans from 16 percent over the past 10 years, and way below the BSP’s minimum requirement of 10 percent. “Philippine regulators want banks to bring their services to more people, and digital banking may be the answer,” it said.