BSP, BAP work on new loan benchmark

The Bangko Sentral ng Pilipinas and the Bankers Association of the Philippines (BAP) are in talks to come up with an alternative loan pricing benchmark on grounds that Treasury bill rates have become too low and thus inappropriate for guiding lending rates.

BSP Governor Amando Tetangco Jr. said banks have submitted proposed alternative benchmarks to the central bank and that the regulator is also studying its own models.

“T-bill rates are no longer appropriate as benchmarks. There are certain proposals on how to address the matter, and the BSP is looking at those right now,” Tetangco told reporters Wednesday.

Private banks claimed that T-bill rates are so low that they are no longer appropriate as a guide for setting lending rates, which have to take into account costs associated with operating a lending business.

The latest T-bills rates are all below 3 percent and lower than the annual inflation rate, which averaged at 3.3 percent as of the first two months of the year.

In the latest government securities auction, the T-bill rates stood at 2.383 percent for the three-month securities, 2.45 percent for the six-month, and 2.808 percent for the one-year bill.

Tetangco said an alternative benchmark is needed to better guide banks in setting interest rates on loans to individual and corporate borrowers.

BAP president Aurelio Montinola III, in a chance interview Wednesday on the sidelines of the Chamber of Thrift Banks’ national convention, confirmed there was a discussion on proposed loan benchmarks.

“We’ve already submitted our position. There will be continuing discussions,” Montinola said.

One of the proposed loan benchmarks is the BSP’s overnight rate, currently pegged at 4 percent a year.

Regulators and industry representatives declined to disclose the finer details of the proposals, but Tetangco said the BSP will make a formal announcement of what will be agreed upon after discussions are completed.

The fall of T-bill rates to below 3 percent is mainly attributed to the huge liquidity in the capital market that has been pushing demand for government securities.

As the market enjoys substantial resources, demand for investment instruments like government securities naturally rises, thereby bringing down interest rates.

Market players also said the improving fiscal position of the national government helps boost demand for risk-free government securities.

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