Effects of Bayanihan 2 on the Rural and Thrift Banks in the Philippines
When news of the “Bayanihan to Recover As One Act” emerged concern spread throughout the microfinance and broader financial community of the Philippines. Overtly pro-poor, it appeared the burden of government recovery efforts would fall disproportionately upon the financial services sector. Media coverage focussed on selected phrases from the draft Act without studying the detail, possibly adding to the concern.
Impact of Bayanihan 1
State-actors would play a leading role in lending efforts to stimulate recovery, presumably competing with the private sector. Some media outlets reported 365-day grace periods and interest-forgivingness, but a careful reading of the text suggested regular interest would accrue as normal, only compound interest, penalties and fees were paused. The 365-day grace period appeared severe, although it was not clear if this was obligatory or voluntary on behalf of the bank, while other measures softened the impact upon the banks – exemptions from loan-loss provisioning, tax relief, sale of non-performing loans to FISTC etc.
The governor of the Central Bank presented a more sanguine analysis of the draft act, observing that the proposed legislation would significantly strain the banking sector; may not achieve the stated goal of promoting lending to hard-hit sectors; risked having unintended consequences, including sparking liquidity problems; and he speculated that the final Act would likely shorten the 365-day moratorium (in line with measures implemented in other countries).
Francis Lim, President of the Management Association of the Philippines, observed that “Around 70% of the depositors are non-borrowers.” The implication was clear: limiting bank income would limit their ability to disburse savings as well as issue new loans.
Bayanihan 2 and the required changes for the Banks
A constructive dialogue around the draft Act presumably took place between the BSP, government and financial sector. Bayanihan 2 remained pro-poor but took a less Draconian tone.
- Loan forgiveness under the Agrarian Reform was limited to loans from state-lenders.
- Private lenders were encouraged to extend flexibility to, including with “low interest rates” (crucially not defined).
- Various sectors were deemed high-priority, in particular health-workers, tourism and agriculture.
- The moratorium was reduced to 60 days during which interest would accrue, but without compound interest, penalties and fees, while “banks and other NBFIs that agree to further loan term extensions or restructuring… shall be entitled to regulatory relief.”
- Section 8 contains a sobering warning to banks and NBFIs that discriminating against clients based on Covid is now a criminal offence.
So what are the practical Implications?
Bayanihan 2 is substantially softer upon the banks than the original text. A 60-day grace period, with regular interest accruing, is reasonable by international standards and shorter than some countries. Further clarification is required from the BSP, in particular, a definition of “lower” interest rates.