Banks got less discount loans from BSP in first quarter

MANILA, Philippines—Discount loans secured by banks from the Bangko Sentral ng Pilipinas declined in the first quarter as banks enjoyed sufficient liquidity to support their lending operations.

BSP officials said the banking sector has been awash in cash due to rising profitability and deposits from the public, thereby depending less on interim financial support from the central bank to be able to maintain smooth operations of their credit activities.

Discount loans are extended by the BSP to banks in need of liquidity to be able to continue lending even if they are tied with receivables.

According to data from the central bank, peso-denominated discount loans extended by the BSP in the first three months of the year reached P6.5 billion, falling by nearly 84 percent from P40.4 billion in the same period in 2010.

Besides liquidity of banks, the drop in the discount loans was also partly attributed to the increase in interest rate charged by the BSP on such loans.

Last month, the interest rate on discount loans was raised to 4.25 percent for all maturities from the previous rate of 4 percent.

The increase was automatic, as the interest rates on discount loans was pegged to the overnight borrowing rate of the BSP. The central bank’s overnight borrowing rate was raised last month by 25 basis points to 4.25 percent.

Overnight borrowing rate indicates the amount charged by the BSP for overnight loans extended to banks.

The increase in interest rate was done to help temper the increase in consumer prices. With higher interest rates, monetary officials believe demand for loans will be dampened. In turn, consumption will also be tempered since this is partly aided by loans.

The increase in interest rate came amid projections that inflation might accelerate this year from last year. Without an increase in interest rate, monetary officials admitted, inflation may exceed the official ceiling targeted by the government.

Inflation accelerated a bit to an average of 4.1 percent in the first quarter, from 3.8 percent last year.

The government aims to keep inflation within 3 to 5 percent.

Buildup of price pressures is caused partly by rising demand that is backed by higher income levels, as well as rising oil prices in the global market.

The Philippines is vulnerable to oil price shocks offshore given that it imports over 90 percent of its fuel requirements.

Rising oil prices are blamed largely on the political tensions in North Africa and the Middle East, oil producing regions, that somewhat dampen supply of the important commodity.