The Republic Act No. 7721 is set to be amended to allow more than ten foreign banks in the country. But do you know what the financial implications on Filipinos are? The Philippine Senate committee on banks studies the approval of recent legislations and these are the pros and cons we can expect from this new legislation.
The Philippines is one of the forerunners in attracting foreign banks with its 7.2 percent growth in the gross domestic product (GDP) in 2013. Foreign financial firms also see the country’s GDP rising by 7.5 percent because of infrastructure projects and the participation of local businesses in the forthcoming economic integration in the region by 2015.
Increased Competition. Small businesses can avail to more credits and the cost of capital would lessen. This will also push banks to become more innovative to stay on top of the banking competition.
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Lower operating expenses due to increased efficiency. Competition among banks may lead to increased operating efficiency that may lead to reduced operating costs and higher service quality for the customers.
Lower interest rates offered to the public. Stronger competition among bank results in significantly lower interest rates for most loan market products. As more banks offer credit, local and foreign borrowers will be capable of securing small or large business loan products at desirable interest rates and terms.
Lower Interest related income. Foreign and local banks may offer income-based repayment strategies designed to reduce monthly interest rates and payments to make it easier for the low-income earners to manage their loans.
Banks with High political influence will tend to close due to competition. The presence of foreign banks can increase the costs of bribery to dishonest government officials resulting in more transparency in government projects tendering.
Non-lending activities like cost optimization and seeking for greater efficiency would keep managers busy. Bank managers shall devote their time in:
- Improving efficiency
- Reducing costs and
- Increasing profitability of the bank to keep up with other banks
The manager has to find ways to ensure that these goals are met without sacrificing the quality of bank services.
Accounting profits would decline. Accounting profit refers to sales revenue minus all the costs the bank sustained in the conduct of its businesses except the cost of equity capital. Higher competition in the banking market is likely to lead to lower prices and the possibility of lower super-normal profits.
Profit volatility. Volatility for profit in the banking sector refers to the amount of uncertainty or risk about the size of changes in the bank’s security’s value. The higher the volatility, the greater the risk of dramatic change in the price of security. The lower the volatility, the smaller the risk of dramatic fluctuation in the price of security. In addition, lower interest rates may also squeeze up the bank’s capital. With stiffer competition, come lesser profits.
Encourages underwriting of riskier loans. Banks that are struggling to stay afloat the competition may resort to lax restrictions on credit. This will eventually encourage other banks to issue more high risk loans with flexible rates and lower underwriting standards.
Many borrowers may begin defaulting as they became unable to pay interest rates. These borrowers may also have trouble refinancing. Banks may lose huge amounts of capital, and many borrowers may lose their securities.
The Effects of Banking Liberalization in the Philippine economy
People would get cheaper credit therefore opening up business is easier. The competitive banking environment will make it easier for borrowers to obtain loans at lower interest rates. Once you have decided on your loan type and tenure that fits your needs, you can apply for a loan. With competition, banks may be easier on your collateral, credit scores and other loan requirements.
In addition, Bangko Sentral ng Pilipinas lose the following benefits of this amendment to the Philippine economy:
Foreign banks can attract more investments into the country: Foreign banks may put up their businesses in the Philippines to target investors who prefer offshore investments from their home country.
Opening the banking industry to foreign banks can sustain the country’s growth and expansion. Foreign banks have the capacity to serve the investment and financial interests of the country’s foreign direct investors.
The Government should Protect Local Bankers’ Interest
Many Filipino bank owners are worried that Senate Bill 2159 and House Bill 3984 may injure their interest. To address this issue, the government must maintain the current 30% ceiling on assets held by foreign banks. Allowing Filipinos to hold at least 70 percent of the assets of the entire banking system will protect the Filipino bankers. The new law must also give the Monetary Board the authority to suspend further entry of foreign banks if national interest is at stake.
Foreign banks are generally more efficient when it comes to operating costs and profitability than domestic banks. Liberalizing their entries in the Philippines will produce positive results like improving profit and cost-efficiency in the Philippine banking system. Can local banks keep up with the competition?
It depends. Domestic banks cannot sustain cost and profit efficiencies due to increased banking competition unless the government improves the regulatory and supervisory framework for domestic banks.
The big question is why our lawmakers have not acted to relax R.A. 7721 earlier if it has this much of a benefit?
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