July 11, 2014

BSP to come up with benchmark for loan pricing

The Philippine Daily Inquirertoday reported that the central bank (BSP) is looking to establish a new and more transparent set of benchmarks for loan pricing. The article quoted the BSP governor as saying that the new benchmarks will be similar to the London Inter-Bank Offered Rate (Libor) which English banks use to set floor prices for extending loans.

The BSP is now waiting for inputs from local banks on the proposed benchmarks with a view of implementing the measure later this year. Further, the regulator is in talks with administrators, data submitters and calculating agents that will work on the benchmarks.

The proposed local benchmark will be based on “done” rates, which are less susceptible to manipulation. The new benchmark will then serve as the floor price for banks, but still allow banks the leeway to add premiums depending on the risk profile of the borrowers.

Our take: We believe that the proposed benchmark will improve transparency in loan pricing. Since it will be based on “done” transactions, the new benchmark will allow the BSP to monitor and regulate loan rates which are way off the mark – those that are either too low or too high. In turn, we expect the measure to discourage predatory loan pricing, as banks which give off-market rates will likely be identified and cited by the regulator.

The proposed benchmark may also discourage banks that typically give come-on rates for their mortgage loans, as these rates are substantially lower than the long-term mortgage loan rates. Theoretically, this should discourage unusually low off-market rates especially during periods of high liquidity. In the end, this should be positive for bank margins.– WealthSec