BSP open to lowering thrift banks’ liquidity ratio

Published October 14, 2020, 1:59 PM

by Lee C. Chipongian

Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno said they will consider the possibility of further relaxing and reducing the minimum liquidity ratio (MLR) of thrift banks from the current 16 percent.

Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno ( Bloomberg )

“We will reassess this level based on prevailing market conditions as well as capacity of thrift banks to effectively manage the liquidity risk exposures,” said Diokno during the Chamber of Thrift Banks’ (CTB) Tuesday webinar convention.

 Diokno has assured thrift bank players that as chairman of the Monetary Board, they will “revisit the current policy towards more relaxation.”

 CTB members have requested the BSP to review the MLR anew either by lowering the MLR or extending the current level beyond 2020 because even at 16 percent, in order to comply with the liquidity requirement, thrift banks’ loanable funds are held in low-yielding and more risky government securities. As such, these banks are exposed to interest rate risk.

 It was in April this year that BSP reduced the MLR from 20 percent to 16 percent of not just thrift banks, but also of rural and cooperative banks as part of relief package to help banks cope with the pandemic.

 The 16 percent MLR which is a liquidity buffer will stay until December 31, 2020 and then it will revert back to 20 percent. Liquidity buffers or liquid assets are used in periods of stress by stand-alone thrift banks, rural banks, and cooperative banks.

The small banks have different minimum liquidity rules depending on whether they are subsidiaries of universal/commercial banks or not.

Diokno has noted that the thrift banking industry “remains highly liquid” since more than a quarter of the industry resources are kept as cash or financial assets with the liquid assets-to-deposits ratio improved to 30.9 percent as of end-June 2020 from 24.9 percent a year ago, he said.

During the CTB webinar, Diokno also said that thrift banks continue to do well even in the midst of the public health crisis, and emphasized the sector’s “sustained stability, resilience, and commitment to support our economic recovery and inclusive growth agenda” with resources of P1.1 trillion as of end-June from P566.4 billion nine years ago. “Deposit liabilities and owners’ funds continue to finance asset growth, highly indicative of the public’s continued trust and confidence in the thrift banking industry,” he added.

Diokno noted thrift banks’ continued support of the micro, small and medium enterprises (MSMEs), real estate development and consumer financing. Some P72.3 billion of loans to MSMEs as of end-June have been released, while P251.2 billion and P302.2 billion were loaned to real estate and consumer finance sectors in the same period.

As part of compliance to reserve requirement ratio which considers loan to MSMEs as such, thrift banks have so far released P80 billion to MSMEs. These were used as alternative compliance of thrift banks with the reserve requirements as of end-September, said Diokno.

Diokno said for future talks and ventures, the BSP is planning to discuss with CTB for documents standardization to streamline some loans, citing the success of the uniform loan and mortgage agreement which started in 2018. “The BSP plans to engage it further for a dialogue on the possible standardization of documentary requirements for small and medium enterprise loans,” he said.

Diokno said thrift banks can also explore further the transformation towards “cloud-based” banking since there are now 20 financial institutions hosting their core banking solutions in the cloud.

“However, there has been an uneven take up of cloud banking among the industry as rural banks represent a disproportionately larger share of cloud adopters. This is something that we hope to understand more through discussions with the industry,” said Diokno.

The COVID-19 pandemic has accelerated the need for digital banking and cloud based technology is part of it.

 “For thrift banks, this should mean two things. First, shifting to the cloud must be seen as an opportunity, as even rural banks have maximized the benefits of scalability of financial services, from mobile and electronic banking to near field communication (NFC) payments,” explained Diokno.

“Second, thrift banks must embrace the change of mindset from a ‘brick and mortar’ thinking to embracing the promise of digital transformation in providing crucial banking services to its clients. Moreover, smaller thrift banks can take advantage of these available digital technology to lower operational costs. The opportunities are limitless, but risks, business synergies and contribution to growth have to be carefully considered,” he added.