Interview: Aurelio Montinola
What developments are taking place in the market for business loans and other financing?
AWRELIO MONTINOLA: With seemingly intact economic fundamentals and ample market liquidity, all signs currently point toward the continued growth in lending in the short and medium term. Moving forward, as GDP continues to rise at a steady pace, albeit perhaps not as quickly as initially forecast, the industry is anticipating double-digit lending growth over the next few years.
Historically, low interest rates have aided a gradual decrease in non-performing loans in the market. At the same time, demand for financing from consumer and corporate clients continues to climb, with borrowers anxious to take advantage of the favourable low interest rates. Additionally, with strong and steady growth of the capital markets in the Philippines, corporations are turning to the bourse as an alternative means of financing and as part of a hedging strategy.
With direct access to capital markets companies can rely less on banks and formulate more balanced equity-debt financing strategies. Whereas banks used to deal solely with consumer and major corporate financing, a whole new class of organisations is currently taking advantage of financing opportunities. Apart from mid-market companies, this includes increasing numbers of small and medium-sized enterprises (SMEs) and even extends to some provincial organisations.
Microcredit is an increasingly attractive segment for commercial banks. How satisfactory is the oversight of this financial segment?
MONTINOLA: Microcredit is still a niche market in the Philippines, but it is one that is poised for substantial growth in the short term. There are already a number of established names in the industry, but the largest banks in the Philippines are increasingly looking to microcredit as a viable expansion opportunity.
There are two statistics that point towards significant growth in the sector. The first is that only about 25% of Filipinos currently bank within formal banking channels, so within the broader banking industry there is substantial potential for growth. The second is that in the Philippines, the A, B and C markets represent a total of only 13% of the population, while the remaining 87% of Filipinos comprise the D and E segments, which are the target markets for microcredit institutions. With a population of almost 100 m people, this offers the industry a significant opportunity.
As wages and disposable incomes continue to rise, and as levels of financial literacy improve, the banking industry will see an increase in demand for financing at the micro-level. While microcredit currently exists largely for semi-social purposes, continued growth and development of the sector over the medium term will boost its economic viability.
How does the strength of balance sheets within the corporate and financial sector in 2011 compare to the way they looked last year?
MONTINOLA: Balance sheets today are extremely strong. Memories of the Asian financial crisis in 1997 are still fresh, so both companies and banks are far less leveraged than they were at that time.
In addition, most corporations opt for local currency financing, so foreign exchange devaluation is less of a concern than it was in previous years. At the same time, growth in the Philippine economy has built confidence to the market. In the past, the country’s economy was much more export-orientated, which made it more susceptible to fluctuations on the international market. The Philippine business model is now based on domestic demand and consumption, which shields the economy to some extent from international concerns.
However, the best hedging strategy is market diversification. Considering the developments of the last few years, Philippine banks and corporations have increasingly turned their attention away from mature Western markets towards Asian ones, which, following the global financial crisis, are offering better investment opportunities and more reliable growth prospects.
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