Interview: Nestor Tan

How have high inflation and the first package of the Tax Reform for Acceleration and Inclusion (TRAIN) affected the banking sector?

NESTOR TAN: The underlying components of the inflation increase in 2018 were issues with the rice supply chain, which is a fundamental part of the basket of goods; the rise in oil prices, which affected electricity and transportation costs; and the foreign exchange depreciation that resulted from the increase in interest rates in the US. Although TRAIN is a contributing factor, it is far from the primary cause. The calculation of inflation is complex. The inflation numbers of the Philippines are based on the consumer price index and a basket of goods that contains many necessity goods that are imported, so cost-push inflation comes into play. In this case, interest rate adjustments might not be the right way to control inflation growth. Banks mostly react to loan demand, and the interest rate is the factor that has the biggest impact on this. Inflation and changes in the tax regime may also affect loan demand indirectly, as they can alter the economy, but interest rates are the most influential factor.

What measures can banks take to promote financial inclusion in the retail segment and control the concentration risks of corporate loans?

TAN: In the retail segment, financial inclusion is largely dependent on market coverage: the more potential customers a bank reaches, the greater chance it will have to penetrate the market. One method to increase penetration is to pursue potential partnerships with entities and persons close to the potential borrowers, such as real estate developers. While both digital and physical presence are important, financial inclusion in the Philippines must be achieved through face-to-face contact, since almost 70% of the country’s population is still unbanked. Clients want to get to know their bank and develop trust. While digitalisation and technology will be key in the future, the unbanked population needs assurance through traditional brick-and-mortar branches. Roughly one-third of municipalities in the Philippines do not have a formal banking presence. We therefore need to reach out to these areas – otherwise it will be impossible to achieve financial inclusion. When it comes to security around financial transactions, customers may use e-wallets for low-value transactions, but are often not comfortable using digital technology for substantial transactions. If our goal is to promote financial inclusion today, we cannot wait for the perception of digital technology to improve; banks need to offer face-to-face services.

Regarding the corporate banking sector, banks have internal limits, and each entity identifies their own limit within a particular company. The economy of the Philippines largely consists of a number of conglomerates. This makes it relatively easy to reach concentration limits in a short timeframe, so banks need to be disciplined in identifying and respecting their own limits. In this sense, the Bangko Sentral ng Pilipinas is very proactive in encouraging banks to be conscious about concentration rates when it comes to large conglomerates.

In which ways could a national ID system help widen financial inclusion, and what steps could be taken to ensure that it has a positive impact?

TAN: A national ID system will have a positive impact as long as the government can guarantee the programme’s integrity. It must be implemented by a credible institution, be biometric-based and be consistently accepted as a form of ID. If implemented properly, an ID system can help to minimise paperwork and increase the ease of carrying out transactions. However, these benefits disappear if it simply operates as an additional form of personal ID.