Bank lending growth remains at near zero

DESPITE the Bangko Sentral ng Pilipinas’s (BSP) aggressive rate cuts to boost the economy through lending, bank lending growth almost ground to a halt in November 2020 as restrictions and uncertainty on the future of the global health crisis continue to dampen economic sentiment in the country.

BSP data released on Thursday showed that bank lending reached its eighth consecutive growth deceleration to near zero in November at 0.3 percent. In comparison, the pre-Covid bank lending growth rate was at 13.6 percent in March 2020.

Theoretically, central banks use interest rate cuts to boost the economy as the lower interest rates translate to the market as lower financing costs, thereby creating an encouraging environment for borrowing and investment.

The BSP has aggressively cut its interest rates for the year to support the economy. In total, the Central Bank has already cut its rates by 200 basis points—25 basis points in February, 50 basis points in March, another 50 basis points in an off-schedule Monetary Board meeting in April, a further 50-basis-point cut in June and the latest 25-basis-point cut in November.

Despite this, bank lending growth continued to sink through 2020. November’s 0.3-percent bank lending growth rate is a further deceleration from the 1.8-percent growth rate in October.

“Bank lending growth waned during the month as the Covid-19 crisis continued to dampen consumer spending and business activity,” the BSP said.

Broken down, loans for production activities grew by 0.5 percent in November from a 2-percent growth in October as outstanding loans to key industries declined further, particularly wholesale and retail trade and repair of motor vehicles and motorcycles, with a contraction of 6 percent, and manufacturing, with a 4.2-percent contraction.

Loan drivers

Meanwhile, the following sectors contributed to the overall increase in production loans: real-estate activities growing by 5.2 percent; electricity, gas, steam and air-conditioning supply at 2.7 percent; human health and social work activities at 45.3 percent; transportation and storage at 8.1 percent; and information and communication at 6.5 percent.

Consumer loans also grew at a lower rate of 7.1 percent in November from 7.9 percent in October. This, as individual borrowers decreased their credit card loans and motor vehicle loan availments during the month.

Bank lending brought the money supply growth of the Philippines to P13.7 trillion in November, up 10.5 percent from the previous year. This is also a slowdown compared to the 11.6-percent growth seen in the previous month.

Speaking in the First Metro Investment Corp.’s (FMIC) annual economic briefing on Thursday morning, University of Asia and the Pacific (UA&P) economist Victor Abola said banks’ reluctance to lend, especially to corporations, will drag on until lenders see an upward trend in local corporations’ production and performance numbers.

“I think it’s due primarily to the bank’s risk aversion. They’ve been very careful in order to preserve not only their liquidity but to make sure that they would be able to face up for any eventuality,” Abola said.

“And it’s not a lack of demand. The consumer firms, particularly, are willing to borrow except that they have had to pass through more rigid screening by the bank. What will convince the banks [to lend]? When they see that the companies that are trying to borrow from them [have] their production is going up on a month-to-month basis and a year-on-year basis,” Abola said.

More rate cuts

Since bank lending continues to be weak, the BSP will likely be inclined to cut its policy rates further in the first quarter of this year, especially as the expected tamer inflation numbers and still negative economic growth rates give them room to do so.

“The BSP will tend to be accommodative [in 2021]. They had to stop because of the spike [in inflation] but as soon as the fourth quarter GDP comes out, which will be negative, there will be a reason to ease up further,” Abola said.

“We are looking at a 25-basis-point cut in policy rates and/or a cut in reserve requirement ratio (RRR),” he added.

The economist said the BSP’s cut will likely materialize in as early as the first quarter of 2021. The data points that the BSP will be looking at are an inflation below 2.5 percent and a negative GDP growth rate.

In a press briefing Thursday afternoon, BSP Governor Benjamin Diokno said they will continue to be “data-dependent” in the monetary policy formulation, but reiterated that they will continue to keep the monetary policy accommodative “for as long as the economy has not fully recovered, or on the way of recovery.”

The BSP Monetary Board is expected to have ita first monetary policy setting meeting for the year on February 8.