Interview: Nestor A Espenilla Jr.

How can fintech support financial inclusion?

NESTOR ESPENILLA: Fintech allows people in areas with limited bank presence to easily access financial services through mobile devices. Our long-term goal is to bring all Filipinos into the formal financial system. As such, we are developing a digital finance ecosystem. We are implementing the National Retail Payment Systems policy framework, which will enable electronic fund transfers (EFTs) across accounts with different financial institutions. We launched the Philippines EFT Systems and Operations Network, an automated clearing house that allows the batching of EFTs, in November 2017. In April 2018 we launched InstaPay, another clearing house that will enable 24/7 low-value EFTs. In a complementary development, Philippine Payments Management – a self-governing body that facilitates and monitors the clearing of EFTs – was established with guidance from the BSP. It was registered with the Securities and Exchange Commission (SEC) on August 30, 2017. Meanwhile, part of our digital finance policy is the use of cash agents. Under BSP Circular 940, issued in January 2017, retail outlets can become a bank’s cash agents. This facilitates the development of an expansive network of access points that will allow users – particularly low-income earners – to move from cash to digital.

The BSP also supports implementation of a national ID system, the bill on which was passed by Congress in May 2018. These initiatives will aid in the transition from a cash-heavy to a cash-light economy.

What has been the effect of recent capital market reforms, and what other changes can be expected?

ESPENILLA: Capital market development is high on the BSP’s agenda. We want a more balanced financial ecosystem, with deep, liquid debt and equity markets that serve as viable alternative financing for longterm investments. As such, the BSP, together with the Department of Finance, the SEC and the Bureau of the Treasury, announced in August 2017 a package of coordinated initiatives to spur the development of the domestic debt market. The reform agenda started with the November 27, 2017 facilitation of repurchase (repo) trading via the Government Securities Repo Programme. By providing alternative ways to raise capital, it aims to boost bond market liquidity and enhance price discovery to support a more robust yield curve.

In support of this initiative the BSP’s Monetary Board approved the assignment of a 0% reserve requirement ratio (RR) on repos to address friction cost. The BSP and the other regulators are working on other elements to be implemented in 2018, including an over-the-counter government securities trading system. This will establish a self-regulatory organisation; increase the volume and consistency of Treasury issuances; launch the Government Securities Eligible Dealers programme, under which obligations, rights and incentives of market makers will be identified; and issue benchmark guidelines.

Meanwhile, the BSP’s amended rules on bank lending support infrastructure development. Under Circular 914 issued in June 2017, the limit on loans a bank may extend to subsidiaries was raised from 10% to 25% of the bank’s net worth, while the limit on loans to affiliates rose from 5% to 12% to accommodate infrastructure projects financed by subsidiaries and affiliates.

To what extent can the lowering of RRs and other reforms help absorb excess liquidity?

ESPENILLA: The BSP is committed to pursuing the RR reduction over the medium term while maintaining price stability. This will address implications on financial institutions’ funding costs, channel funds towards productive activities, facilitate capital market development and support the BSP’s broader efforts to make monetary policy implementation more market based.

We are closely tying in the RR reform with broader capital market reform efforts. This will help ensure absorption of liquidity as a result of the RR cut and mobilisation to support longer-term investments.