SOME people may argue that modern-day banks are completely different from their predecessors. This is true, considering that a century or so ago, banks printed currencies. Banks have always accepted deposits for safekeeping and acted as lenders.
But in the last 50 years, banks have seen their lending function change dramatically. Fractional-reserve banking, or the ability of banks to lend more money than what they have in deposit, has been a game-changer for the banking industry.
However, letting a borrower take out a loan against the value of a hard asset is what most banks in the Philippines traditionally do, and it has kept our banking system sound and stable.
For example, your brother-in-law borrows money from you to open a food kiosk. You might consider that a loan, but, in reality, you are a partner in his business, as the repayment of the loan is dependent on the profitability of the kiosk.
Alternatively, if he wants to borrow money to buy a new gold wristwatch and you are not paid back in cash, at least you can get the hard asset (the watch). This is a secured loan, which is less risky.
Everyone is very concerned about local banks extending too much credit, especially after learning that a top local bank expects its consumer loans to grow by 20 percent this year. The mix of the loan growth will be about 40 percent for housing loans, 40 percent for auto loans and about 20 percent for unsecured credit-card financing.
Each of these types of loans carries its own risks, and also its own profitability. The riskier the loan, the higher the income the bank gets. While we know that major local banks are not going to deliberately overexpose themselves to potentially bad debt, the Bangko Sentral ng Pilipinas (BSP) is supposed to do everything it can make sure they don’t go on a foolish lending spree.
A few days ago, the BSP released new, stricter rules for “too big to fail” banks, requiring them to increase their capitalization. This comes on the heels of much closer monitoring of the banks’ loan portfolio and borrowing mix.
These are all critically important, and the BSP needs to constantly be on top of the lending situation. The nation’s economy depends on its vigilance.
But as the BusinessMirror Banking & Finance columnist George S. Chua so smartly wrote last week in his piece “Zero-percent down!”: “Make use of auto loans as sparingly as possible.” While banks are loaning against a hard asset that they can recover, consumers are borrowing against their future earnings.
It is up to the BSP to help protect the country from bad bank-lending practices. It is up to all of us, as individuals, to protect the Philippines from bad borrowing practices.