DAVAO CITY—The government needs to monitor the lending activities of inhouse lenders and other nonbank entities to contain risks of overexposure and avoid the financial pitfalls to certain front-running sectors, like real estate.
This emerged as one of five policy recommendations uncovered at the 2014 Consumer Finance Survey, whose findings were only disseminated publicly this year.
The Bangko Sentral ng Pilipinas, which conducted the survey looking into the financial condition of Filipino households, uncovered the need to “establish regulatory and supervisory infrastructure to monitor lending activities by nonbank institutions and companies to minimize system-wide risk and exposure without reducing credit opportunities for consumers”.
Such lending activities are alternatively known as “shadow banking transactions.”
“Considering that most households that borrowed money did so from nonbank institutions/companies, particularly in-house financing, nonbank government institutions and money lenders” makes the close monitoring of these activities that much more compelling.
“Banks may have the incentive to take advantage of the regulatory arbitrage by increasing their exposure to shadow banks,” the BSP survey said.
The monetary authorities clarified that “as the economy continues to expand, lending activities of nonbanks, particularly lending institutions, could increase significantly, underscoring the need to look into the potential risks of overexposures to certain sectors, like real estate as well as the financial soundness of loan practices and transactions of nonbanks”.
“Moreover, the linkage and degree of exposure of banks to nonbank institutions (financial and nonfinancial institutions) which provide in-house financing, has to be measured and monitored regularly,” it added.
The monitoring would allow government and other institutional bodies to craft and impose “appropriate and timely mechanism and policies to effectively manage credit risks”.
The worse scenarios in the banking and financial community over uncontrolled and unmonitored lending, even by banks, include risks of defaulting payments and increase in nonperforming loans, closure of banks and loan and credit cooperatives due to insider abuse on loans extended to officers and stockholders.
Rosabel B. Guerrero, director at the BSP Department of Economic Statistics and who presented the result of the 2014 survey, said a memorandum of agreement (MOA) was recently signed by the members of the Financial Stability Coordination Council comprising the BSP, Department of Finance, Insurance Commission, Philippine Deposit Insurance Corp. and Securities and Exchange Commission, along with the Housing and Land Use Regulatory Board.
She said the memorandum would “facilitate information-sharing among the agencies as a proactive initiative of the Council to better understand the interconnectedness and to mitigate the build-up of systemic risks in the financial system”.
“With this MOA, the BSP could now request the support of the Housing and Land Use Regulatory Board in collecting data from nonbank financial and non-financial institutions who are engaged in construction, selling and lending activities in the real-estate sector,” she said.
The data requested would aid in “monitoring the total debt exposure of the financial system to the real estate sector, as well as their lending practices to safeguard risks arising from overexposure and unsound loan transactions,” she added.
The 2014 Consumer Finance Survey is the second quadrennial survey conducted after the 2009 inaugural CFS, the BSP said.
The CFS generates data on the financial conditions of households, including what they own, both financial and nonfinancial assets, as well as from whom and how much they borrow, such as sources of credit and level of indebtedness.