Prudence is banking sector’s trump card
THE CENTRAL BANK'S ACTIONS TO SAFEGUARD THE ECONOMY'S STABILITY CAME AT A CRUCIAL TIME FOR THE PHILIPPINES AND HELPED THE FINANCIAL SECTOR SAFELY THROUGH THE ASIAN CRISIS

When the Asia crisis of 1997-98 swept through the Pacific like a typhoon, the Philippine banking system managed to stay afloat because someone had the foresight to close the portholes, so to speak, before it hit. That process had started in 1983 when a major crisis and brush with debt default forced authorities to ratchet up capital requirements and establish the first bank supervisory mechanisms. As a result, when other countries’ financial institutions were foundering, listing or simply sunk like a rock, most of those in Philippines sustained damage that was kept within the limits of the repairable.

Rafael Buenaventura Governor of the Philippines Central Bank

According to Rafael Buenaventura, Governor of the Philippines Central Bank, what started off as a matter of lucky timing has become the key to long-term strategic thinking aimed at bringing greater stability, cohesion and modernization to the sector. Rather than indulging in self-congratulation for having gotten off lightly, the authorities have taken steps to assume an even stronger role.
“Our biggest concern is to make sure our banks have adequate risk management systems in place,” says Mr. Buenaventura. One result of this policy of pre-emptive prudence is that the percentage of non-performing loans held by Philippine banks is only around 15%, the lowest figure for all of Asia, and less than half the rate in countries such as Thailand or Indonesia.

“We are not out of the woods yet,” acknowledges Mr. Buenaventura. “We certainly have our problems, like most of our Asian neighbors, but we feel we are in better shape to deal with them.” Raising capital adequacy requirements, imposing tight criteria for risk evaluation, closing loopholes that allowed speculators to flourish while ensuring that result reporting, auditing and accounting practices conform to international standards are some of the areas in which the central bank has taken timely action.
But the scope of its functions extends beyond supervision, regulation and enforcement. In addition to formulating monetary policy by ratcheting interest rates up and down, it has a proactive enabling role to help the financial sector develop and become more internationally competitive, such as a legal framework that eases the way for mergers that bring efficiencies of scale for some banks while encouraging smaller players to seek out niches in which their size can best be turned to an advantage.

As part of this ongoing process, restrictions on bank ownership have been loosened to allow foreign entrusts to control 100% of a bank’s voting stock in certain cases. “We are probably Asia’s most liberal country in allowing the entry of foreign banks,” says Mr. Buenaventura and notes that the 17 multinationals currently operating in the Philippines control around 14% of the systems’ total resources. “The result has been an update in desk practices and technology that has allowed us to become more competitive.”

CUTTING EDGE Renewed competition has forced Philippine banks to invest in technologically- advanced services in order to attract customers.

To meet that goal, in banking as in other sectors of the economy, IT has proven to be the factor that makes the difference. E-banking is off to a good start and the Bankers’ Association is working alongside the central bank to develop an RTGS computerized system for real-time transaction settlement. At the same time the forthcoming Fixed Income Securities Exchange will be built on a state-of-the art technology platform allowing for electronic trading and benchmarks while adhering to the delivery vs. payment standard that will reduce settlement risk.

Says Mr. Buenaventura, “we can retool our banking system because we have the people to do it. Like India, almost everybody here speaks English, and Filipinos are quite versatile when it comes to computer applications. When you go to Malaysia you’ll find that the engineers are all from here. As far as programmers are concerned, we are probably the world’s biggest supplier. We have a lot of engineers, something like 100,000 new graduates each year.” The net result, the central bank chief says, will be tremendous improvements felt at all levels of the banking industry and at the consumer end above all. In an IT-enabled environment, it is not surprising Citibank has transferred its call center to the Philippines. Their accounting for the rest of Asia is now done out of Manila and soon the European bookkeeping operations will migrate as well. “Even the Indians are beginning to run into infrastructure problems and are starting to come here to set up their IT operations.”