BSP: Banks’ real lending rate fell by end-2011

Real lending rate in the country fell by the end of 2011 as inflation reportedly ate up a portion of banks’ earnings from loans extended to individual and corporate borrowers.

Based on a report from the Bangko Sentral ng Pilipinas, average bank lending rate in the country stood at 6.8 percent by the end of 2011.

This was actually higher than the 6.4 percent registered in the same period the previous year.

However, data showed that the rate of increase in consumer prices accelerated during the same period to 4 percent from the previous 3 percent.

As a result, real lending rate—or the difference between average bank lending rate and inflation—fell from 2.8 percent by end-2011 from the 3.4 percent reported in the same period the previous year.

Nonetheless, the regulator said, banks in the country stayed generally healthy last year for exercising prudent lending and investment practices, which led to higher profits, growth of capital and manageable levels of exposure to bad debts.

The rise in average bank lending rate last year was influenced by the setting of the BSP’s key policy rates.

After allowing key rates to settle at historic lows, the BSP last year raised its policy rates by a total of 50 basis points, bringing its overnight borrowing and lending rates to 4.5 and 6.5 percent, respectively.

The BSP’s monetary policy influences commercial interest rates. The regulator said that higher interest rates helped keep inflation within manageable levels.

Higher rates make bank loans more expensive and, thus, less attractive. In turn, a slowdown in the growth in loans would help temper the increase in overall demand and inflation.

Officials said that inflation could have been faster if not for the hike in interest rates.

Inflation averaged at 4.4 percent last year, well within the government’s target range of between 3 and 5 percent.

But according to monetary officials, the concern this year has shifted from inflationary pressures to slowdown in economic growth.

As such, the BSP last month cut its policy rates by 25 basis points. The move is meant to help spur growth of loans, and accelerate consumption and investments.

The economy, measured in terms of gross domestic product, slowed down to a growth of 3.6 percent last year from 7.6 percent the previous year. This was largely due to the decline in export earnings brought on by the debt crisis in Europe and the anemic economy of the United States—the Philippines’ major export markets.

The government hopes to fast-track economic growth this year to a range of 5 to 6 percent, partly by boosting domestic demand and public spending.