Chuchi Fonacier
Three years ago, no country, government or central bank could have predicted the negative impact of the COVID-19 pandemic on our way of life and livelihoods. Its impact was keenly felt by everyone, particularly the vulnerable sectors of society.
Nonetheless, the COVID-19 pandemic has also become a catalyst in bridging the divide between the unbanked and the formal financial sector. It has served as an impetus for the widespread use of digital payments as customers shifted toward the use of online platforms for their financial transactions.
Taking advantage of this innovative trend, new market players are using emerging technologies to break down financial products and services. This allows for the unbundling into microproducts or the reconfiguration of offerings from multiple financial providers for a more inclusive financial ecosystem.
Meanwhile, the Banking Sector Outlook Survey of the Bangko Sentral ng Pilipinas (BSP), conducted in 2021, showed that Philippine banks have placed digitalization as a top priority for the next two years, mostly in the area of customer-facing systems such as payments and deposits.
Banks that harness and integrate these technologies into their operations are able to develop user-friendly, low-cost solutions and leverage on new distribution channels that transcend brick and mortar models.
For customers, this means access to real-time, convenient and customized product offerings that are attuned to their needs and circumstances. It also creates an opportunity to onboard financially excluded and underserved market segments onto the formal finance channels.
E-wallets
Let us take the case of mobile wallets. Regionally, mobile wallets have taken the Southeast Asian payments sector by storm.
In the Philippines, mobile wallets have become the go-to-method for Filipinos to pay bills, apply for credit or obtain funding for business operations.
These payment wallets have penetrated users at the community level, from “sari-sari” stores to market vendors, tricycle drivers and even indigent Filipinos through the National Government’s social amelioration program, or the Pantawid Pamilyang Pilipino Program or 4Ps.
Because of the high smartphone ownership in the country, mobile banking has also become a popular way for customers to access their bank account, surpassing online banking. A mobile banking application or app is a key differentiator, making it a must-have rather than a nice-to-have feature for banks to remain competitive.
Harnessing the power of digitalization to further advance financial inclusion is a massive growth opportunity given that 36 million or around 47 percent of the Philippine adult population remains unbanked, or do not have access to traditional banking services.
Statistics from the National Financial Inclusion Strategy for 2022 to 2028 also point to the presence of a huge untapped market that can be onboarded or brought into the formal sector:
– Only 13 percent of young adults and 35 percent of working-age adults have formal accounts;
– 53 percent of adult Filipinos had savings in 2019, nearly half of them keep their savings at home; and
– More than half of borrowers sourced their loans from informal sources, mostly family and friends followed by informal lenders
Navigating the future
Another key lesson that we have learned from this pandemic is the critical role of sustainability. The economic and social loss brought about by natural disasters and climate change hazards has further compounded the effects of the COVID-19 crisis, especially for vulnerable communities.
This highlights the need for the government and the private sector to work closely together in accelerating the country’s sustainability agenda. In arriving at effective solutions, technology can be a core medium in designing solutions that would help mitigate and increase resilience to climate change as well as broaden access to sustainable finance.
The fusion of technology, sustainability and financial inclusion was echoed in a World Economic Forum article in May 2022 when it mentioned the key areas needed for banks to be able to take advantage of the digital wave. It shared that synergy between digitalization, green development and safeguarding the interests of the disadvantaged groups is crucial.
While digitalization can spur green development, they are not always in sync.
According to a report from the Galaxy Digital in 2021, digital equipment and services have been the largest source of energy consumption for banks. The global banking system consumes as much as 263 terawatt-hours per year of power, more than double than the energy consumption of Bitcoin, which only consumes around 113 terawatt-hours of energy per year. Banks should be able to address the negative environmental impact of digitalization in banking.
Moreover, as banks meet the financial needs of the underserved through digitalization, issues such as equitable access to electronic devices and internet connections need to be resolved. Financial literacy would also have to be complemented by knowledge on digital technology. Safeguards are, therefore, needed to ensure that the rights of disadvantaged groups are protected.
Recognizing the critical role these play in shaping the future of banking, the Philippines has elevated these into strategic objectives at the national level. This ensures that public and private sector resources are efficiently mobilized into achieving common goals.
The playbooks
The Philippines Sustainable Finance Roadmap, the National Strategy for Financial Inclusion or NSFI for 2022 to 2028 and the BSP’s Digital Transformation Roadmap serve as the over-arching principles to guide economic agents in their decisions.
For its part, the BSP has been mobilizing and coordinating efforts on the implementation of programs that promote digital transformation, sustainable finance and financial inclusion.
The BSP’s Digital Payment Transformation Roadmap aims to have 50 percent of retail payments done through electronic channels and to expand the proportion of the financially included to 70 percent by 2023. In 2020, the Philippines was able to meet a milestone with digital payments hitting 20 percent of overall payments.
Consistent with our road map, BSP is also collaborating with the Philippine Payments Management Inc. to broaden use cases for the InstaPay and PESONet infrastructure.
First is the establishment of an interoperable Bills Pay Facility which will address the existing fragmented bills payment mechanism. Next, the operationalization of Request to Pay and Direct Debit Facilities will empower customers to initiate collections of nonrecurring receivables and to better manage recurring payments, respectively.
The BSP has also issued six digital banking licenses which will help broaden digital touch points to reach the underserved at lower cost.
Complementing the BSP’s digitalization agenda is the passage of the Financial Consumer Protection Act or the FCPA and the Digital Payments Bill.
On one hand, the FCPA improves the resolution mechanisms for financial consumer complaints, including those involving cybercrimes. On the other hand, the Digital Payments Bill mandates all government agencies to adopt digital payments with respect to their disbursement and collection transactions.
Sustainability imperatives
Meanwhile, the BSP has adopted Sustainable Central Banking as a strategic priority. The BSP was among the early investors in the Bank for International Settlements Green Bond Fund, placing $550 million to help finance investments in green projects, including those across the Asia-Pacific region.
Issuance of Philippine banks of green, social and sustainability bonds both in local and foreign currency have already reached P152.9 billion and $1.3 billion, respectively. These figures include banks’ issuance of social bonds targeting the micro, small and medium enterprises and blue bonds allocating funds to projects that prevent marine pollution among others.
The national government has also tapped the international sustainable bond market, raising $1 billion from its maiden sustainability global bond issuance in March 2022 and another 70.1-billion Japanese yen sustainability Samurai bonds in April 2022.
The BSP has, likewise, issued enabling regulations to promote sustainable finance in the country through the adoption of the Sustainable Finance Framework and detailed guidelines on the management of environmental and social risk, especially in the areas of credit and operational risk.
The BSP is already working on the third phase of regulations which includes the issuance of guidelines on the integration of sustainability principles in the investment activities of banks. The BSP is also coordinating with the World Bank on the conduct of the climate stress testing exercise to estimate the potential impact of climate and other environmental-related risks to the banking system.
On the legislative front, the BSP is looking forward to the enactment of the Enhanced Agri-Agra and Rural Financing Bill which recognizes sustainable finance as an eligible form of compliance with the mandatory credit. Lastly, the BSP collaborates with the private sector and government agencies on programs to promote financial education and consumer protection, in line with the NSFI.
Robust banking system
Against this backdrop, Philippine banks remain in a position of strength, buoyed by the country’s better-than-expected macroeconomic fundamentals and supported by the BSP’s carefully crafted prudential reforms geared toward achieving full economic recovery.
Preliminary data as of end-April 2022 showed sustained asset expansion with banks’ total resources increasing by 6.7 percent year-on-year to P20.7 trillion, compared with the P19.4 trillion recorded last year. Total loans also grew by 7 percent to P11.4 trillion in April 2022, a reversal from the 2.5 percent contraction a year ago, marking the ninth consecutive month of positive year-on-year growth rate in total loans since August 2021.
Loan quality remains satisfactory with lower nonperforming loan or NPL ratio at 3.9 percent as of end-April 2022, better than the 4.4 percent a year ago. This was accompanied by sufficient NPL coverage ratio of 90.6 percent for the same period which is higher than the 81.5 percent posted last year.
Alongside these improvements, Philippine banks reported higher net profits of 26.3 percent year-on-year to P66.3 billion as of end March 2022, a turnaround from the 5.7 percent contraction posted in the same period a year ago.
Banks have also maintained sufficient liquidity buffers and are well-capitalized above regulatory and international thresholds. Liquidity coverage ratio of universal/commercial banks was at 200.3 percent as of end-February 2022, twice the minimum requirement. Moreover, capital adequacy ratio of these banks on solo basis was at 16.2 percent as of end-March 2022.
Leaders of the banking industry expect double-digit growth in assets, loans, investments, deposits and net income in the next two years. Latest consumer and business confidence surveys also indicate a more optimistic outlook in the next quarters, which is expected to boost lending activity going forward. The NPL ratio of banks for 2022 is also projected to remain manageable, far lower compared with the double-digit figures during the Asian Financial Crisis.
Moving forward
At the height of the pandemic, the BSP implemented timely regulatory and operational relief measures to assist banks, households and businesses withstand the health crisis. The BSP also extended the effectivity of select prudential measures until December 2022 to lessen the financial burden on Filipinos and to provide undisrupted financial access.
The enactment of the Financial Institutions Strategic Transfer Act in 2021 also serves as a standby mechanism for financial institutions to dispose of their nonperforming assets, if needed.
Meanwhile, like the rest of the world, the Philippine growth outlook is faced with risks related to the resurgence of new variants of the COVID-19 virus and a prolonged Russia-Ukraine conflict. The BSP will continue to strengthen the prudential framework to ensure the financial and operational resilience of banks.
In the 1970s, Barry Commoner, an ecologist, summed up the basics of ecology in one of his laws: “Everything is connected to everything else.” This interconnectivity has applications outside of ecology as well. People with growth mindsets look at the world as a confluence of systems where interacting agents are viewed as parts of a whole. These people are often associated with innovation, creativity and strategy.
I am hopeful that with this powerful mindset and the conversations today, we would gain insights as to how each of us can best contribute to a bright future for our beloved country. —CONTRIBUTED INQ
Chuchi Fonacier is BSP Deputy Governor for the Financial Supervision Sector, mainly responsible for the regulation of banks and other BSP-supervised financial institutions.