CB plays vital role in controlling credit

Title

Creator

Montilla, Daniel A.

Identifier

Bank of banks: Central Bank encourages growth of RP banking

Language

English

Source

May 31, 1970

Year

1970

Subject

Banking industry -- Philippines

Credit control

Monetary policy

Central banking industry

Credit management

Central Bank of the Philippines

Rights

In Copyright - Educational Use Permitted

Fulltext

CB Plays Vital Role in Controlling Credit 'Bank of Banks' Central Bank Encourages Growth of RP Banking By DANIEL A. MONTILLA It is indubitably clear that credit should be re gulated since unrestrain ed credit expansion or contraction can lead to unprecedented booms or slumps, causing unhealthy or undesirable effects to the economy. In the Philippines, as well as in other countries where central banking operates, the Central Bank plays a vital role in controlling credit and, if done properly and effica ciously, can contribute to economic stability. Republic Act No. 265, the law which established the Central Bank of the Philippines, provides for various instruments of credit control and these serve not only as imple menting monetary policies but to a great extent they underlie and shape them as well. A significant instru ment of credit control is the imposition of bank re serve requirements. Un der the law, the Monetary Board may prescribe ra tios from 10 per cent to 50 per cent against de mand deposits and 5 per cent to 25 per cent against time and savings deposits. Within these ranges un due expansion of credit can very well be restrict ed. 100 Per Cent However, in periods of inflation if such percen tages are not sufficient to contain credit the law al(Continued on Page 9} BANK OF THE PHILIPPINE ISLANDS “The Pioneer Bank Of The Orient” Established 1851 DOMESTIC AND FOREIGN SERVICES • Checiung Accounts * Savings Accounts » Fixed Deposits • Loans, Discounts A Overdrafts » Commercial i Traveler’s L/Credit * Foreign Exchange * Collections A Transfers • Export^Import Financing TRUST SERVICES • Executor & Administrator • Guardian • Management of Real Property • Custodian of Securities • Trustee d- Transfer Agent in Security • Pacing Agent for Bonds A Coupons • Management of Pension Trust Financing International Trade With Complete World-Wide Facilities If your business is world-wide, you need the world-wide banking fa cilities of the British-owned Hong kong and Shanghai Banking Cor poration specializing in financing international trade with complete world-wide facilities through o networkc-4>over 170 offices in both hemispheres. BRANCHES AND AGENCIES METROPOLITAN AREA: Arranque Espafta Malate (Dart) SUBURBAN AREA: Makati PROVINCIAL: Cebu Davao The Hongkong and Shanghai Banking Corporation A BRITISH BANK SERVING THE PHILIPPINES SINCE 1875 Cagayan do Oro AGENCIBB: Dlgoa Agency (Davao del Bur) San Nicolas Agency (Cebu) Tagum Agency (Davao del Norte) MANILA OFFICE: ILOILO CITY OFFICE: 117 JUAN LUNA*TEL. 47-93-21 LEDESMA St.*TEL.2911 T. S. WRIGHT Resident Manager Page 6 BANKING SUPPLEMENT Sunday, May 31, 1970 CB Plays (Continued from Page 0) lows the MB to prescribe ratios even as high as 100 per cent against any fu ture increase in the depo sits of each bank and a decrease in these reserve requirements in times of deflation. An equally important instrument designed for the same end is the fixing of interest or rediscount rates on Central Bank loans. Judging from the experiences of many coun tries, this instrument in the hands of the CB re mains a most potent and lating inflationary and deflationary tendencies. However, in order not to cause harm, this instru ment should be used only in accordance with the character and terms of credit operations, the cre dit needs of the market, composition of the Central Bank’s portfolio and the general requirements of the national monetary po licy. Thus, in this connection, the law requires that the radiscounts, discounts, loans and advances which the CB is authorized to ex tend to banking institu tions shall be used to legulate the volume, costs, availability and character of bank credit and to pro vide the banking system with liquid funds in times of need. Circulars A third type of credit control is direct action by the Central Bank. This kind of instrument regu lating credit may assume direct dealings with banks on a bank-to-bank basis where the other means of control have failed or proved inadequate. The forms of direct action may consist of memoranda and circulars and these are necessarily coercive re quiring compliance from individual banks and car effective weapon in regurying penalties in case of non-compliance. However, short of em ploying the coercive meas ure of direct action or without resorting to the You get a lot more than interest on your money when you save at Citibank As little as P5.00 opens a Citibank Savings Account - and we have unique ways of making your money grow and of making it more useful to you. For instance, Citibank Savers can get low-cost loans: Our customers may be eligible for loans at bank rates. Bank loans cost much less than any available elsewhere. - You can apply for money to improve your home — for appliances or a new car — tor education and recreation. Your money works for you - yet you never take your savings out of the bank. In addition we offer: • In-Plant Banking - "bank from your office" • Systematic Savers Plan - automatic transfer^ from current account to savings account. • Down Payment Savings Plan • 6% interest computed and paid quarterly. Plus this new service: PERSONAL FINANCE SPECIALISTS In our lobby, you’ll meet a group of friendly people. They will answer your questions about loans, savings plans, even your budget. Pay us a visit, won’t you? We’d like to meet you personally. FIRST NATIONAL CITY BANK Juan Luna. Port Area. Cebu. Clark Airbase The only bank your family ever needs 1970 BANKfNGSUPPLEMENT Pdge 9 other equally mandatory instruments of credit con trol. the CB can still at tain the desired goal by means of moral suasion. This tool may take the form of published an nouncements, holding of conferences, meetings ^ith the Bankers Associa tion of the Philippines (BAP) and the like where in plans and courses of action are proposed and discussed. The object is to seek the cooperation of banks in the realization of the objectives of the Cen tral Bank tc stabilize the currency and promote overall economic progress. That this approach has proven successful in ma ny cases in the past, in that the banking commu nity has heeded the call of PNB BANK MONEY ORDER (BMO) are now available at the following: PASAY CITY DEVELOPMENT BANK 2462 Taft Avenue Extension Pasay City 2ND BULACAN DEVELOPMENT BANK MacArthur Highway Meycauayan, Buiacan and also at its Branches at: Malolos, Valenzuela, (Polo) Bocaue, including its Extension Office at Meycauayan town proper BMO IS EVERYWHERE FOR YOU! PHILIPPINE NATIONAL BANK 124 Branches and Aganciaa throughout tho Philippine* Correspondent Banka throughout tho World Cable Addrow: PHILNABANK support by the Central Bank, is due largely to the fact that appeals of this sort have instilled in the banks a sense of belonging and of being enthusiastic partners with the CB in the praiseworthy task of bringing about monetary stability and material wel fare . Open Market Another important measure of credit control which is. beginning to take roots in developing coun tries although still in its infancy in the Philippines is the traditional tool of open market operations. This instrument can very well serve as a brake to unwarranted expansion of credit in times of inflation and as an accelerator in granting more credit in periods of deflation. The first situation can be effected when the Cen tral Bank shall not make purchases of securities in the open market or at best minimize such purchases or even sell its security holdings. On the other hand, the second situation, i. e., in case of declining money supply and big do ses are needed to be in jected into the economy, is realized when the CB undertakes more purcha ses, withholds sales of its security holdings or re purchases its bonds or certificates of indebted ness. In this country open market operations »has been resorted to not only to control credit but also to make more people bank conscious since commer cial banks serve as agents in the encashment of bonds, to encourage forced savings habits and, most importantly, to finance economic development of the country. In addition, when open market operations expand or restrict credit, bank re serves are either increased or decreased. When the Central Bank purchases securities in the open mar ket the proceeds of the sale are credited to the member bank’s deposit ac counts at the Central Bank. This will increase the reserves of the banks because of an increase of the money available for circulation. Conversely, when the CB sells securities in the open market, the deposit accounts of the member bank will be debited, re sulting in the shrinkage of money supply and thereby in the bank reserves. Thus if the bank reserves are expanded member banks can provide more credit to the public and if bank re serves are reduced less cre dit is available. Other Reasons Besides the fact that open market operations as a uevice in controlling credit is comparatively of recent vintage in the Philppines; there are other reasons why it cannot be used extensively as yet in this country. For one thing, the market for se curities is small and the country is still largely agricultural where it is duiicuit to develop among the people the conscious ness of investing their mo ney in Donas and securi ties. For another thing, the people are not accustomed to buying and selling them and it is believed it would take some time to reorient their minds toward invest ment in securities. Never theless, education and mo ral suasion can be very useful measures that can bring about changes in this direction. There are still other ins truments that can control credit and which are bet ter known as selective cre dit control measures such as the placing of ceilings on rediscounts of commer cial banks and the re quirement that commer cial banks should main tain a one-to-one ratio between their actual fore ign exchange assets and foreign exchange liabili ties. There are authorities, however, such as Dr. Gre gorio S. Miranda, who claim that the former measure did not entirely curb lendings made by commercial banks and therefore not very effec tive in controlling credit. But the one-to-one ratio which was designed to check unnecessary im ports has been more effec tive in regulating credit with the added advantage of reducing the amount of the foreign exchange lia bilities of commercial banks with the correspon ding increase’ in their fo reign exchange assets. Other Measures Still in certain instances these traditional instru- * ments of credit control may not be effective enough to cope with the situation, say a rapid skyrocketting in money sup ply or an unchecked de crease in the quantity of money in circulation, bringing about a serious case of deflation. To be sure, many central banks in the world, including ours, have invariably em ployed other measures, singly or collectively in conjunction with the tra ditional instruments. These measures are the rationing of credit (i.e., placing a limit on dis counts) , prescribing mini mum cash margins for opening letters of credit and the imposition of mi nimum ratios which ca pital and surplus of banks must bear to the volume of then assets. By and large, however, all these credit control measures, despite their li mitations imposed by cir cumstances, lack of fiscal restram t, the law and the usual untra m m e 11 e d spending on developmen tal projects and public works, have contributed in one form or another to ward the expansion of cre dit and the curbing of un warranted expansion and consequently that too of the money supply. *His work on this mat-' ter, Business and Go vernment, has been used as reference for this ar ticle. The Corner Bank (Continu.ru /tom Page 5> tively account for 53 per cent of Provjdent’s total number of depositors and 42 per cent of its total de posits. To keep pace with the bank’s growth, Provident has expanded its lending operations. At present, its total outstanding loans amount to over P41 mil lion. A majority of these loans were granted for real estate development and housing construction as a response to the present need for housing facilities. Provident today enjoys the trust and confidence of over 110,000 depositors who avail of the 12-hour service of the bank from Monday to Saturday. Such, trust it has continuously nurtured through improv ed and better services and relentless efforts in looking for means to bring higher returns for the funds en trusted to it by these de positors. Page'10 BANKING 'SUPPLEMENT Sunday, May 31, 1970

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