By Amado P. Macasaet
The obvious lack of loan demand is forcing the banks to offer one-year no-collateral loans to just about anybody they feel may qualify.
The offers charge interest rates as high as 3 percent a month or close to 15 percent a year. Loan limit is as much as P2 million but the average is P1 million.
No collaterals are required.
That is one side of the coin.
The other side is the equally frantic search for high yields by investors. Interest incomes on sovereign liabilities and private bonds are only slightly over five percent a year.
In fact, some banks are offering products with a yield of less than three percent over five-year tenors. Money has never been so easy to come by. But reasonable profits are just as difficult to find.
This situation that has marked the financial landscape for more than four years makes the stock market active. It is to be noted though the money invested in shares of stocks finds its way into companies with long history of dividend payments.
That removes the speculative element in the market. The risks are minimal.
In that sense, the capital market has also taken a flight to safety. The proof is in the payment by 150 listed companies of more than P300 billion in 2013. The market has sobered up.
Taken on purely technical basis, present yields on nearly all types of investments are only several percentage points above the inflation rate.
It is clear that the economy has been going through a regime of safety over high yields always attended by higher risks.
Classically, there is always a feud between the fiscal and monetary sectors in a market economy. The fiscal side opts for growth at nearly costs, particularly higher prices or inflation.
On the other hand, monetary authorities are always preoccupied with stability.
In the Aquino administration, there appears to be a clear cooperation between the fiscal and monetary sides.
This is the direct effect of an economy that has been growing steadily for more than four years.
As frequently said here, a market economy goes through the cycle of expansion and contraction.
Monetary authorities are beginning to see signs of contraction. It is taking steps to cushion its effects particularly on prices of basic commodities. The Monetary Board yesterday raised the key rates for the third time this year.
Again as frequently said, here, the banks, not making enough from interest on loans since demand is low, are selling many non-bank products but the yields to the investors are still low. The banks offer the products and collect a fee from the investors.
These products have to be complemented with incomes from interest on loans. The banking system must have come to grips with the reality and necessity of living with low interest incomes.
Big loans are charged at rates from eight to 10 percent. The way to get high interest income is to lend small to as many as possible in one-year maturities with interest of higher than 30 percent a year. The offers made mostly through cellular phones say approval can be made in 3-5 days. The forms are sent to the prospective borrowers. The requirements are simple.
Security Bank, for example, says all it needs for the application for clean loans to be processed for borrowers who are employed are photo copy of company ID, front and back, two government-issued identification cards, proof of pay slip for June and July, and ITR for 2013.
Kelvin Chan who made the offer by text message also works for China Trust in soliciting loans. He makes offers through his cellular phone No. 63915134738.
The offer does not mention the necessity for a borrower to get a guarantor acceptable to the bank.
The banks have obviously learned lessons from the fact that non-performing loans have come down to about two percent.
Records of small borrowers, particularly market vendors, show they hardly ever fail to honor their obligations. They pay on time because they know they would have to borrow again.
As their payment records improve, the lenders give them bigger amounts.
The first bank that “dared” make the offer is Citibank. On the other hand, Metro bank that issues the Master Charge credit card entices clients to a periodic 50 percent discount mostly in Chinese restaurants eligible to those who are in the platinum card category.
It is not clear who shoulders the hefty discount: the establishment or the card issuer. Information technology companies have joined the effort to attract more subscribers to postpaid cellular phones. Globe
Telecoms sends its subscribers a message that says “you’re the one selected postpaid plan that (is) given 35 percent discount on your bill. Sources in the Bangko Sentral and in banking sector told Business Insight spreading the loan risks in small amounts is administratively expensive and messy. However, a 10 percent default among say 100,000 no collateral borrowers translate into P10 million in bad accounts.
On the other hand, a single default by a borrower in the hundreds of millions, if not billions of pesos, can affect the capital accounts of the lenders. Provisions for bad loans are deducted or taken out of paid capital.
Sources say the number of no-collateral borrowers is increasing not only as a result of the banks campaign but in recognition of the inevitability of loan interest going up a result of the slow but apparently determined decision to raise the key rates that becomes a signal for the banks to increase the interest on the money they lend.
The banks have also learned to be more selective in issuing credit cards. The rate of default remains. Unpaid balances are charged 3 percent a month or 36 percent a year.
Credit cards are actually financing operations where the lender recovers losses form the borrowers who do not default.
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