Banks reduce rediscounting loans by 78%

Qualified banks included in the central bank's rediscounting facility only took out P26.90 billion of rediscounting loans as of end-2020, 77.98 percent lower compared to end-2019 of P122.17 billion.

Based on Bangko Sentral ng Pilipinas (BSP) data, there were less banks that availed of rediscounting loans during the lockdown period, in fact the availments were frozen at P25-27 billion in the last half of 2020 because banks have excess cash following the BSP’s liquidity-enhancing measures as a defensive response to the virus outbreak.

About 50 banks have an active rediscounting line with the BSP amounting to P321 billion last year, of which 17 are universal and commercial banks. The rediscounting lines were part of banks’ contingency funding plan.

The big banks have accounted for P26 billion of the total while the rest or almost P1 billion were released to thrift and rural/cooperative banks.

The rediscounting loans have a maximum term of 180 days and because of the pandemic, the BSP has reduced the term spread relative to the BSP’s overnight lending rate to zero regardless of maturity, from 1-day to 180-days.

Before the BSP shifted to an interest rate corridor system four years ago, the rediscounting facility was a popular central bank toolkit for managing liquidity in the system. It’s an alternative to reducing the policy rate.

The BSP in the past impose a limit or a specific budget to its rediscounting facility. Last year, with the pandemic, the BSP removed the facility’s budget cap and adopted an “open regime”. This was part of BSP’s temporary relief measures granted to banks to cushion the impact of restricted economic activity.

Qualified banks can avail of the BSP’s rediscounting credit facility for temporary liquidity requirements by refinancing the loans they extend to their clients using the eligible papers of its end-user borrowers. Accepted eligible papers or credit instruments are classified as commercial credits, production credits

and other credits.  

The last revision BSP implemented for its rediscounting rules was in January last year in preparation for the discontinuation of the London Inter-Bank Offered Rate (LIBOR). LIBOR, the dominant reference rate for a long time, will expire by the end of this year and it will be discontinued after being plagued by rate-rigging issues.

The BSP and other affected central banks in the region will have to come up with alternative reference rates and risk-free rates with the discontinuation of the LIBOR.

Last year, also before the pandemic, the BSP also approved a shift from fixed to a flexible term premium for the rediscounting facility to have the flexibility to recalibrate the rates.