Lower rates seen not enough to boost bank lending
Lower interest rates may not be enough to spur bank lending during times of economic slowdown as both banks and borrowers tend to be risk-averse during moments of uncertainty.
That was according to a discussion paper published by the Bangko Sentral ng Pilipinas (BSP), which also found that policy rate adjustments have uneven effects on the activities of big and small banks.
The paper, authored by Carolina Austria-Escranda and Bernadette Marie Bondoc-Quiban, explained that while rate hikes can easily restrain economic activities by curbing loan growth, the level of effectiveness is not the same during times of relaxed monetary policy.
“During accommodative periods, lower interest rates may not suffice to boost lending. Banks may be reluctant to lend due to heightened perceptions of borrower risk or diminished profitability,” the BSP researchers wrote.
“Borrowers may also be unwilling to take on new debt amid economic uncertainty,” they added.
The BSP delivered total cuts amounting to 75 basis points last year in a bid to boost an economy that might have grown below official targets last year, after consumption and investments were restrained by high borrowing costs and persistent price pressures.
And Governor Eli Remolona Jr. had hinted at additional easing moves this year, even floating the possibility of another rate cut at the Feb. 20 meeting of the Monetary Board as financial conditions are still “somewhat tight.”
But Remolona had admitted that his previous signal of more rate cuts cumulatively worth 100 bps now appears “too much” amid emerging price risks. That suggests that the intended economic boost from the ongoing easing cycle might not be as strong as the BSP wants.
So far, credit growth remains robust despite the still elevated interest rate environment.
Preliminary data showed outstanding loans of big banks—excluding their lending with each other—expanded by 11.1 percent year-on-year in November, a near two-year high, as businesses slowly regained their appetite for credit.
In the same discussion paper, the BSP researchers also said that the bank lending channel of monetary policy is relatively weaker for larger banks because of their “diversified funding sources and robust liquidity management.”
But the impact of policy shifts is more pronounced for the smallest banks.
“The limited responsiveness of larger institutions may dilute the effectiveness of monetary policy in influencing aggregate lending,” they said.
“However, the sensitivity of the smallest banks indicates that policy rate increases could still have a contractionary effect on credit supply, particularly for borrowers who depend on smaller financial institutions,” they added. I
