Wednesday, September 06, 2006

Those lazy bankers!

Are the country’s banks serving well the country’s development needs? Policymakers should closely consider this question. Last week, no less than Romulo Neri, the country’s top economic planner who said that banks so far has been engaged largely in “lazy banking” or content on harvesting profits off people’s purchases of cellular phones and appliances at the expense of “project financing” (funding tangible development projects) for that the country needs for economic takeoff.

Neri said the country the country now is awash with cash, a significant portion of which are OFW money, and that the country’s savings rate is now high at about 30 percent of GDP as compared to about 20 percent in 2000. Had banks been more engaged in project financing, the county could have achieved better performance than the 5.6 percent growth rate that the country has achieved in the first half, thus creating enough jobs to make a dent on joblessness.

The Philippine economy has been growing within the 5-6 percent range at least in the last ten quarters. It’s not as good as China’s or India’s but that growth rate is decent enough to enrich certain sectors. Certainly, the banking sector is one of those beneficiaries of a buoyant economy. In fact, within the same period, the banking sector has been growing at double digit rates, reaching even as high as 27 percent in the third quarter of 2005. The banking sector, therefore, never had it so good. But where did the banks get those impressive growth rates?

Apparently, not so much from lending. In the first half of the year, loans outstanding by commercial banks barely grew by 1 percent. Lending on productive sectors of the economy like agriculture were stagnant (loans outstanding to agriculture grew only by 2.8 and to manufacturing by -7 percent in the first six months of the year). They probably got those impressive growth rates from handling remittances from overseas workers, and financing consumption like cellular phones, cars, and other purchases through the credit cards.

From this statistical information alone, one could see why Neri is complaining about the weak performance of banks. It shows that banks are simply too happy making money off the sweat of OFWs and ordinary workers without taking the risk of investing in tangible and job-creating projects.

What explains this very conservative behavior? One explanation is probably lack of confidence in the short and medium prospects of the economy. But this explanation is funny because the Philippine has been doing quite well in the last two years. Latest survey by the Bangko Sentral ng Pilipinas indicates that the private business sector is optimistic about the future.

The usual suspect of course is the high percentage of non-performing loans among banks’s lending portfolio. However, it shows that the banks’ NPL ratios have actually been improving in the last few years. In May, for instance, the banks’ NPL is down to about 7 percent, a significant improvement from last year’s 11 percent.

The most plausible explanation probably is low capital base among banks. Neri seems inclined to believe this angle. Solution? Why not raise the bank’s capital base by allowing infusion from investors? This sounds so elementary but it’s a scenario that is not likely fly given the nature of ownership in Philippine banks. Banks usually are family-owned hence raising their capital base would dilute ownership, something that most families don’t like.

The ultimate solution therefore lies with opening the banking sector to more competition. This could be done in several ways like allowing one hundred percent ownership by foreign investors. Another is by liberalizing the opening of bank branches to introduce more market competition. And the best is combining the two policy measures. If anybody could invest in sari-sari stores or in a manufacturing plant producing hotdogs without the government telling them how much percent ownership they could have and where to put their plants, government should allow the same rules of the game within the banking sector to introduce more competition and efficiency.


Lala Rimando said...

I think banks will just take advantage of the opportunities made available to them. The remittance business is one, though in fact I think they're even late in tapping this. We've been sending OFWs in droves for years.

My point is, banks, like any other money making business, tend to look for sources of growth (or sometimes, risk reduction, as in the NPLs causing loan growth to stagnate). If companies are expanding, as they did pre-1997, then banks tend to gravitate towards these clients. If it's the remittance business, the same is true. These are basic business practices.

When we knock on their conscience and expect them to behave differently - like fund development projects, etc - we have to remember that while we expect them to make social contributions, these projects also need to make business sense. For example, will these projects be completed on time? Will their business assumptions hold and not be threatened by political instability? Will they need to bag these projects by giving bribes to government officials who sign them off? The bigger picture involves systemic concerns. Point a finger to the banks and more will be pointed back to the government.

Perhaps what the local banks really need to face up to is their interest rate margins (the difference between cost of funds and lending rates). It's one of the highest in Asia. I've heard risk-return explanations before, but I'm still not convinced those account for a big big chunk of the fat margins.

Each one has sins to answer to.

Without Borders said...

that simply proves my point about rent-seeking. and its simply because of oligopoly. when we dont have those restrictions on ownership and bank branching, surely banks would have the incentive to look beyond squeezing money off people's backs.