The country’s thrift banks may start lending more aggressively in the coming months following a regulatory move that reduces the risk weight of dollar-denominated government debt paper on their balance sheets.
Bangko Sentral ng Pilipinas (BSP) Deputy Governor Nestor A. Espenilla Jr. said the decision, which would further boost the economy, was a direct result of the country’s attainment of an “investment grade” last year.
“What it means is that banks will have more flexibility to give out more loans,” Espenilla said over the weekend.
Speaking to reporters, Espenilla said the lower risk weight of dollar-denominated government debt paper, referred to as ROPs (Republic of the Philippines), would ease the banks’ burden of holding onto these securities.
Last week, the BSP issued new rules that cut the risk weight of ROPs held by stand-alone thrift and rural banks to 50 percent from the previously “hard-coded” 100 percent weight.
Standalone thrift banks are small lenders that are not subsidiaries of universal and commercial banks. Thrift banks that are part of larger banking groups are already covered by a previous ruling that reduced the risk weight of ROPs for universal and commercial banks as a result of the investment grade rating.
Last year, major credit rating firms’ Fitch Ratings, Standard & Poor’s, and Moody’s Investor Service, upgraded ROPs to investment grade, reflecting the government’s improving capability to repay its obligations.
This also reflects the fundamental strength of the Philippine economy, which allows the government to post higher tax collections.
The reduction in risk weight should lead to an improvement of banks’ capital adequacy ratio, which is a measure of the capital amount needed to be set aside relative to a bank’s risk-weighted assets. This should allow banks to lend more aggressively to the public and help fuel economic growth.
“It creates more headroom for banks. It’s a relaxation of rules, but it’s a well-deserved one because of the investment grade rating,” Espenilla said.