Those big bad banks

LOS ANGELES, California – While going through the websites of Philippine newspapers, there was this item about BSP Governor Paeng Buenaventura being quoted as having assured that the BSP's intention to keep interests rates as low as possible is in order to spur economic growth. Nothing new with that thought. That's typical BSP PR stuff.

What I found interesting was the next sentence. Tio Paeng apparently threw up his hands in frustration as he wondered what good such low interest rates would be to the economy if the banks still refuse to lend. Indeed, one wonders if the banks have forgotten their true functions. For quite a long time now, our banks would much rather buy government debt papers than take market risks as banks should.

Tio Paeng is right. Our banks must rediscover themselves or its officers must stop calling themselves bankers. It is bad enough that they made more than a few bad calls lending to friends and related interests in the past. Must they now punish the Philippine business community with this risk-averse attitude?

Going through the websites again, I noticed another story, that of company A laying off 150 workers out of 5,000 because the business environment has become tougher. The industry with which company A is a part had been hit by sharp declines in revenues last year. But company A, the country's largest and most profitable in that industry remains terribly viable.

But tell that to the banks. Simply because company A happens to have corporate relations like company B and company S, both undergoing debt restructuring, traditional creditors of company A decided to re-evaluate its credit lines. If the banks are worried company A might siphon the funds to its sick relations, the use of the funds could be monitored and strict stipulations attached. Banks should give the owners more credit than to do something as stupid as sacrificing a crown jewel for troubled affiliates.

But because of the banks' questionable logic, even highly profitable company A must sacrifice potentials for growth. If there is any trigger to the job cuts company A had to make, it is this silly reaction of the banks to the problems of its corporate relations, which have nothing to do with company A's business itself.

Luckily for company A, it generates a large enough cash flow to take care of itself, assuming it undertakes drastic cost cutting to streamline operations. But think of the opportunity losses that could arise from its limited ability to use credit to expand its business now when expanding is good.

As a result, against its usual practice of avoiding layoffs, company A had no choice but to do just that, thanks to the banks. If it happened to a very profitable blue chip like company A, think of what is happening in the rest of the economy because banks would rather buy T-bills than lend money even to a highly profitable venture, as they should.

Maybe Tio Paeng and the Monetary Board should consider measures that will make banks act like banks. Maybe the amount of government debt instruments they can buy for themselves could be limited or something along that line. Unless the banks are ready to help local businesses operate, expand and save jobs, our economy is going to be in real trouble.

Trickle down

In a way, they are having the same problem here in the United States. The Federal Reserve has brought down interest rates so much last week but the common man has yet to feel it. Credit card interest rates are still at 40 percent. There are short-term loans with triple-digit interest rates. And there are also mortgages that are almost double the going rate.

An article in the Christian Science Monitor this week laments that "even as the Federal Reserve has cut short-term interest rates to their lowest level in more than 40 years," the reality of high interest rates is still being faced by low-income borrowers, many of them minorities. "Those on the economy’s bottom rung are paying to borrow money at rates that are far higher than those paid by people with easier access to credit."

The Monitor explains that "low-income borrowers pay higher interest rates, in part, because they lack the income to qualify for conventional loans." So there are companies that take advantage of the poor with "payday" loans, usually offered by check-cashing services. An individual may borrow $250 in exchange for a $285 check dated for their next payday in two weeks. That is equivalent to a 390 percent annual interest rate.

But lenders say they provide a service that’s badly needed since most banks don’t make loans of less than $500 and finance companies usually want some form of collateral. "We are the best and only alternative," says Billy Webster, president of the Community Financial Services Association of America in Alexandria, Virginia.

That sounds like the five-six loan sharks or sometimes called lending investors back home. They may serve a function of providing credit to the poor, but the extremely high interest rates keeps the poor in bondage, making it that more difficult of them to spring out of poverty. No wonder the microfinance projects of some NGOs are so successful.

When the Federal Reserve or the Bangko Sentral lowers interest rates, it does so as part of a theoretical assumption that by doing so, one stokes the fires of demand to get the economy roaring. The central banks do not directly target who benefits. Back home, when the BSP lowers interest rates, the banks just get a wider spread because the benefit is not always passed on. Maybe, to fine tune the system to make the theory work better and with an added social conscience, some measures could be taken to see to it that low interest rates trickle down to people and businesses.

If the system works well, and the economy booms because when the demand is stimulated by people and businesses, everyone benefits, including the banks.

Bad bank

Speaking of banks, here's something from Dr. Ernie E.

The coed came running in tears to her father. "Dad, you gave me some terrible financial advice!" she cried.

"I did? What did I tell you?" asked the dad.

"You told me to put my money in that big bank, and now that big bank is in trouble."

"What are you talking about? That’s one of the largest banks in the world," he said. "Surely there must be some mistake."

"I don’t think so," she sniffed. "They just returned one of my checks with a note saying, ‘Insufficient Funds’."

(Boo Chanco's e-mail address is [email protected])