Change in SDA rate may affect bank costs

MANILA, Philippines - Banks could suffer higher costs should the central bank push through with a plan to shift to an interest rate corridor mechanism, but hopefully this would be offset by stronger loan demand, debt watchers said.

Fitch Ratings and Moody’s Investors Service weighed in on the Bangko Sentral ng Pilipinas’ decision to study revising its monetary policy system in a bid to provide more funds to a growing economy.

“A change in the SDA (special deposit account) rate may have an impact on profitability and hence banks may be encouraged to lend to support earnings,” said Alfred Chan, Fitch director for financial institutions.

Under the plan, SDA – banks’ parked funds with the BSP – will be charged with a lower interest rate from originally being pegged at the overnight borrowing rate, or the interest where banks’ loan prices are pegged.

In January, the process of shifting began with the decision to cut SDA rates to three percent from 3.5 percent, which is the current overnight borrowing rate. Meanwhile, the overnight lending rate – used for interbank lending – stands at 5.5 percent.

The “corridor” refers to the range between the SDA and lending rates, within which the overnight borrowing rate will be usually placed.

Since SDA rates will no longer pay that much, Chan pointed out banks would prefer to lend more than park with BSP some P1.8 trillion in their “excess” money. This, in effect, would be seen to support economic growth in the process.

While more loans will be beneficial, Moody’s analyst Simon Chen warned this could also pave the way for more bad loans, something that could put pressure on banks’ health and ultimately affect their lending capacities.

“The possibility that banks may undertake aggressive credit growth, which is often the pre-cursor to asset quality issues, cannot be ruled out,” Chen said in an e-mail.

For Glenn Levine, senior economist at Moody’s Analytics, the problem lies more on the interbank lending rate, which is used as benchmark by banks when they lend among each other for liquidity needs.

As the BSP would have the choice to widen or narrow the “corridor,” Levine said banks would need to have more capital in order to manage “fluctuation.”

“So depending on the size of the corridor, banks would face a rate that varies from day to day, making decisions such as around capital a bit more difficult,” Levine said in a separate e-mail.

“This implies that banks may have to hold higher levels of capital, which is less efficient and less profitable,” he added.