THE CENTRAL BANK is looking to allow banks more leeway in setting loan rates for retail clients in order to provide cheaper credit for borrowers in good standing.
Bangko Sentral ng Pilipinas (BSP) Governor Nestor A. Espenilla, Jr. said the regulator is working to ease current rules on loan pricing towards a risk-based approach, which could spell lower interest rates for Filipinos with good credit scores while also allowing wider margins for those with history of default.
“To differentiate risks among bank borrowers, we are currently studying adoption of the risk-based pricing framework for bank loans. This will encourage good borrowers to avail of more loans because of the lower interest on account of their good credit standing,” Mr. Espenilla said in a recent speech.
In turn, this arrangement will allow lenders to be more decisive in setting rates for customers with “poor credit quality” despite the pressure to reduce loan costs due to competition, as such practice exposes financial firms to potential systemic risks, the BSP chief said.
Currently, regulators attach a standard 75% risk weight for banks’ retail exposures. The Bank of International Settlements has cited the need to tweak this rule by factoring in the risks drawn from a certain loan.
The proposed changes come ahead of the rollout of a local credit scoring system under the watch of the Credit Information Corp.
The central bank has been actively crafting “principle-based” and “risk-based” policies instead of imposing a one-size-fits-all standard, with the latter seen to leave smaller firms under too much regulation and may curtail innovation in offering new financial products and services.
BSP Circular 971 published in August 2017 requires all financial players to adopt policies that would allow risk identification, aggregation, mitigation, and monitoring among its ranks. Under the new guidelines, any firm should be able to put into writing its risk appetite, which would spell out the risks which it is “willing to assume” to achieve its business objectives.
The BSP has also eased rules on lending to micro- and small-scale firms by assigning a lower risk premium to loans granted by banks via credit surety fund (CSF) cooperatives, with the goal of prodding increased lending to this sector.
Loans extended to CSF-member businesses will be assigned a 20% risk weight, a substantial decline from a 75% weight assigned to all retail credit lines.
Retail clients and small-scale firms are deemed riskier segments due to bigger chances of default compared to corporate clients which are more likely to settle their loans. As a result, banks impose wider margins for individual borrowers. — Melissa Luz T. Lopez