Down the road, rural banks will have a chance to tap a bigger volume of an important facility from the Bangko Sentral ng Pilipinas (BSP) to support their liquidity, which will be for the ultimate benefit of the rural banking industry’s market—the poor.
The BSP recently released a circular that will limit the access of banks to the regulator’s rediscounting window to make the facility more market-driven. This will prompt bigger banks like universal and commercial banks to source their temporary funding requirement from the market instead from the rediscounting facility.
Bigger banks, by the sheer size of their resources, naturally have more funding sources compared to smaller capitalized banks like rural banks. The BSP circular, thus, will enable commercial and universal banks to transition to market-based access to BSP funds for liquidity.
The new BSP circular will take effect on November 15, 2013, which involves the establishment of two separate rediscounting windows: one for universal and commercial banks, to be called rediscounting window (RW) I; and another for thrift, cooperative and rural banks to be dubbed as RW II.
The RW I allows the BSP to lend funds to banks with government securities as collateral. It uses the overnight repurchase rate plus term premium. On the other hand, the RW II allows the BSP to borrow from banks, which could be paid at a specific period of time using government securities as collateral. It uses the overnight reverse repurchase rate plus term premium.
Thrift banks, coop banks and rural banks will be able to access RW II at existing terms, but with a specified term premium per loan tenor, and only for a transition period of five years for thrift banks, and 10 years for coop banks and rural banks.
By November 2018, thrift banks will no longer have access to the RW II, while coop banks and rural banks have until November 2023. After this, the RW II will be closed down and all types of banks shall access only the RW I.
The rediscounting window allows qualified banks to obtain loans or advances from the BSP, using the eligible papers of their borrowers as collaterals. It is a standard credit facility provided by the BSP to help banks liquefy their position by refinancing the loans they extend to their clients.
For instance, if a bank extends loans to its borrowers who then execute credit instruments in favor of the bank, the bank then rediscounts the credit instruments with the BSP, by endorsing the same in favor of the central bank. In turn, the BSP lends the bank an amount equivalent to a certain percentage of the face amount/outstanding balance of the borrower’s credit instrument. The bank may use the proceeds of the BSP loan for new loans to other borrowers, or to address its liquidity needs.