Bank lending seen increasing on SDA outflow

Stricter rules on the access of investors to central bank special deposit accounts (SDA) will likely lead to faster lending growth in the coming months, providing further support for the country’s growing economy.

In the latest issue of its monthly Market Call report, First Metro Investments Corp. (FMIC) said that as money starts flowing out of the SDA window, banks are expected to lend more to the public to put funds to good use.

The report, prepared by FMIC and the University of Asia & the Pacific, said the effect of funds being released from SDAs was already seen last May.

Growth in domestic liquidity accelerated to 16.3 percent, from 13.3 percent the previous month, the report read, citing data from the Bangko Sentral ng Pilipinas (BSP).

“This was attributed to a more rapid expansion in Net Domestic Assets, as banks channeled more funds to lending activities,” the report said.

It added that outstanding loans of commercial banks expanded by 13.1 percent in May, faster than the 12 percent in April.

Given that the construction sector has been the leading sector of the economy, lending to real estate, renting and business services increased by 24.3 percent.

The release of funds from SDAs comes as a result of recent restrictions on the access of nonpooled trust accounts to the BSP window.

Under the restrictions, banks are required to unwind 30 percent of these nonpooled funds out of SDAs by the end of this month. The remaining 70 percent would be removed in November.

Total funds in SDAs declined to P1.79 trillion at the end of June from P1.85 trillion the month before.

This was also down from the record-high end-month level of P1.92 trillion last February.

SDAs were originally envisioned as a tool that the BSP could use to mop up excess liquidity from the economy to curb inflation pressures without having to touch key policy rates.

However, with the government’s improved fiscal position pushing down yields for state-issued IOUs, local banks resorted to parking depositors’ cash in SDA accounts as they searched for investments with better yields.

The build-up in SDA funds also came amid the slow implementation of the Aquino administration’s flagship Public-Private Partnership (PPP) infrastructure program. Funds originally meant for big-ticket infrastructure projects were parked in SDAs instead.

In a bid to reverse the cycle, the BSP slashed since the start of 2013 the interest rates for SDAs by 150 basis points to a record low of 2 percent across all maturities.

In a separate report, Dutch financial giant ING said it expects P400 billion to flow out of SDAs by the end-July deadline. By the second deadline in November, this number is expected to bloat to P1 trillion.

“The (fund) migration would likely raise domestic liquidity growth to around 20 percent or more within the next 12 months, which may bring about higher inflation expectations for late 2014 and for 2015,” ING said in its report.