Funds Transfer: Boon or Bane to the Viability of Rural Financial Intermediaries

FUNDS TRANSFER OPERATIONS: BOON

OR BANE TO THE VIABILITY OF

RURAL FINANCIAL INTERMEDIARIES Julius P. Relampagos

and Mario B. Lamberte

WORKING PAPER, SERIES NO. 88-22

This paper is also beingcirculated as ACPC Working Paper Series No. 88.14 by the Agricultural Credit Policy Council.

October 1988

Philippine Institute for Development Studies

ACKNOWLEDGEMENT

We

wish

to

Agricultural

acknowledge

Credit

for

Development

(OSU)

and

the

United

States

This

financial

institutions

This Manuel Cris

Douglas

names

paper

F. Montes Jovellanos

comments

study

their

and Graham

has

was

(PIDS), Agency

made

here

for

benefited

(PIDS) suggestions and

and

Ohio

with

in

by the

Philippine

Insti-

State

-University

the

Development

this

cooperation

study.

We

of cannot

confidentiality.

the

valuable

technical

Melanie

Dr.

the

provided

International

possible

the

of

the

for

from

from

support

(ACPC),

included

(UPSE),

(OSU),

Council

Studies

(USAID).

financial

i

Policy

tute

enumerate

the

Milo

comments

support (PIDS),

of

Dr.

provided

by

and

Dr.

Richard

Meyer

Stephen

Pollard

(OSU).

TheAuthors

from

the

(OSU),

Dr.

Table of Contents

I

Introduction

1

II.

Punds Transfer Operations and Savings Mobilization: Some Theoretical Considerations ..............

4

III.

Major Findings .....................

i0

IV

Policy Implications

32

References

t

•

•

t

t

i

•

•

•

•

•

Annex ...............................

•

•

•

•

u

•

,,a

•

•

•

•

,Q

•

37 39

List of Figures

i.

Temporary Liquidity Problem ...............

6

2.

Structural Liquidity Problem ............

9

3.

Flow of Funds ....................

16

4

Bank l" Quarterly, 1986

21

5.

Bank 2: Quarterly, 1986..................

22

6.

Bank 3: Quarterly, 1986....................

23

7.

Bank 4: Quarterly, 1986.................

24

List of Tables

i.

Direction of Ftmds Flow, 1986 . .........

12

2.

Frequency Distribution of the Value of Transfers, By Type of Bank, 1986 (_)..................

13

3.

Minimum Loan Size Requirement and Loan Ceilings Per Bank

Type, 1986 4.

5.

6.

Transfer Deposits,

....................

Pool Rates and Interest Rates

By Bank Type, 1986 ...............

on Savings,

17

Time 19

Parameter Estimates of Factors Affecting the Volume of Funds Transferred, All Banks, 1986 ............

29

Regression Results, Deposit Mobilization Nbdel, All Banks, 1986..............................

31

FUNDS TRANSFER OPERATIONS: BOON OR BANE TO THE VIABILITY OF RURAL FINANCIAL INTERMEDIARIES* by Julius

I.

is

allocate the to

Relampagos

and

Mario

B.

Lamberte**

INTRODUCTION

Financial arm

P.

used

intermediaries to

funds

raise to

Philippines, the

creation

funds

from

and

financial

incomplete

supposed surplus

credit-worthy past

Of

are

more

policies or

"one-arm"

to

have

units,

two

and

productive had rural

arms.

the

0._

other,

borrowers.

largely

t¢ Ir

contribute(

financial

inter-

*Paper presented during the ACPC-PIDS-OSU sponsored seminarworkshop on "Financial Intermediation in the Rural Sector Research Results and Policy Issues" held on 26-27 September 198( at the Cuaderno Hall, Central Bank of the Philippines.

This i{ part of a larger study on comparative bank analysis joint1: conducted by the Agricultural Credit Policy Council (ACPC) Philippine Institute for Development Studies (PIDS), and Ohi_ State University (OSU).

The project was coordinated

by Dr. Mari_ B. Lamberte (PIDS)and Dr. V. Bruce J. Tolentino (ACPC). **Respectively, Research PIDS. The views expressed in and do not necessarily re_lect

Associate, this study those of

PIDS and Vice-President are those of the author= the Institute.

2

1/ mediaries

(RFIs).

rams of tion

the

In

government

merely

particular,

made it

as conduits

of

the

very

subsidized

profitable

government

for

funds.

credit

prog-

RFZs to

func-

The

•failure

of

Z/ these

credit

effect

is

programs that

mobilization

switch

the

availability

the

in

has

retarded of

policy

the

savings

withdrawal the

of

fact

fully

Only

viable

to

RFIs

of RFIs. ...

to

reduced. fill

encourage

in

the

savings

sidesavings

least

rural, are

the

funds.

emergence

mobilization

then

expected

this

in

to

by

recog-

low-income

new

a truly

to

behind

approach

set

viable

and lending

contribute

forces,

void • left

even

of

and

agricultural

This

Of

programs

of RFIs

functions.

a sustained

increase

to the rural areas.

mobilization iberal

.

the

on market

the RFIs

at

credit

can be mobilized

can genuinely

With a

main

of

reliance

objective

in the flow of credit Savings

greater credit

savings

developed

development

of subsidized

such subsidized

The is

with

to

that

communities. policies

formal

been greatly

Their

RFIs.

towards

of

more

nizes

well-documented.

the recent withdrawal

the

mobilize

they

function

-With

sector

are

appears interest

to

be a not

rate policy,

so difficult

task

a remarkable

rise

•

i/ RFIs include private development

rural-based branches banks and unit banks.

ZJ For example,

see Sacay

et

al

See Tolentino(1987).

See Lamberte

and Bunda (1988),

(1988).

of

commercial

banks,

3

in

rural

deposits

matched

by

Lamberte

(1987),

opment

credit

branches

to

Thus,

time,

in

have

areas

Manila.

been

rise

a

banks

rural

has

their

of

left

lending

formal

financial

institutions

the

flow

the

cies.

need

of to

RFIs.

rethink

As

stood.

a first In

this

transfer

schemes

truly

the

viable

entire

step,

the

particular

operations

quota

of

in

in

Metro

only

this

RFIs,

the

of

government of

and

the deposit

run

There

areas

is

is,

must

is a need

to

poli-

counter

of

banks

reversing

retention

behavior

there

pushing

in

rural

directly RFIs.

This

areas.

to developing

bank

by

devel-

located

approach

case,

noted

mobilized

objectives

rural

favor

been

well-developed.

the

of

in

loan

these

creating

of

not

private

funds

incomplete not

into

funds

agricultural

However,

policy

one

the

and

offices

with

response

of-loanable

maintain

funds

policy

of

is

has As

banks

head

function

undermines

the

most

this

areas.

commercial

again

clearly

far,

rural

respective

outcome

So

However,

to

transferred

we are

their

noted.

to

the

therefore,

a

truly

viable

be well

under-

to

study

the

branches.

3/ See

areas (1988),

Z/

Blanco

The reasons are discussed and Untalan

and

Meyer

why in and

(1988).

RFIs prefer not to Lapar and Graham (1988), Cuevas (1988).

lend Magno

to and

rural Meyer

The former stipulates that banks allocate 10 percent of their net loanable funds to agrarian reform beneficiaries and 15 percent, for general agricultural lending while the latter requires banks to invest 75 percent of their total deposits in the same service area.

(See Lamberte and Lim [1987] for more details).

4

The

(I)

(2)

(3)

specific

What

is the

questions

this

structure

of

based

branches

of

banks?

Or

it from

one

branch

is

What

factors

one

branch

What

is

savings

determine to

another

the

impact

paper

funds

the of

of

mobilization

head

volume

of

same

funds

answer

one

of

branch

to

rural-

another?

office?

funds

transferred

from

bank?

transfer

efforts

are:

operations

it from

the

the

to

transfer

Is to

aims

of

operations

rural-based

on

the

financial

intermediaries?

The

next

regarding Section on the

II,

funds

presents

Relampagos

(1988).

last

discusses

transfer

IiI

theoretical

operations

some

and

empirical

Some

considerations

savings

results

policy

FUNDS TRANSFER OPERATIONS THEORETICAL CONSIDERATIONS

clearly

some

mobilization.

which

implications

draw

are

heavily

discussed

in

section.

In the

it

section

rural

visible.

implies

a

example,

in

working

capital

season,

while

areas, It

is

certain

the

pattern

funds

to

are

MOBILIZATION:

of

recognize

in the

flow

rice-producing

farm-households

excess

SAVINGS

seasonality

important

predominantly by

AND

sharply being

economic

SOME

this of

feature

accumulated

For

demand

during during

is

since

resources.

areas, rises

activity

for

planting harvest

season. rural

In the areas,

season.

or

after in

harvest

or

working

assets

credit

from

they home

(e.g. when

capital. still

financial

pay

radios, planting

Although

attractive

savings

instruments.

Any

that

deal

with

tion

of

bank

the this

seasonality

there that

are one

nates.

a

scans

the

that

there

course,

rural

Inevitably,

the

in 10/

the

two

is not of

flow

town

of

of

follows

It

harvest

that

for of

of

town,

say

country.

demand

has

rice

of

squarely

The

implicaparticular

$.

Although

it is

assumed

farming,

domias

is further seasons

the

absence

assumption

credit

low

to

a

in Figure

unrealistic

and

the

funds

in this

an

the

areas

be

their

yield

the

activity.

activity,

planting

pattern

rural

of

cash

can

augment

savings

is

in

which

to

because

is depicted

economic this

thiE

on

activities

landscape

are

them

planting

either

etc.)

of

in the

Whatever

kept

comes

forms

in the

town

economic

agricultural Of

bank

in

other

on to

during

debts. is

of economic

seasonality

situated

their

season

these

operates

ICMs

camera,

hang

bank

institutions

the

consumption

farmers

more

the

for

mortgaged

returns,

formal

season,

provision

physical

sold

of

farmers.source

At

left

absence

assumed per

experienced

dominant

one

year. by

economic

activity.

For In negative involved

empirical

support,

see

TBAC

(1981).

the case of cash, any positive inflation rate yields return.

In the case of physical assets, the cost in liquifying them could be high.

I0/ Note that the demand for credit here refers only to those of credit-worthy borrowers as perceived by the bank.

For a discussion on the stages in determining credit-worthy borrowers, see Lapar and Graham (1988).

6

7

The

presence

alternative

form

teristics dity,

of

of

these

etc.)

the

of

are

savings

a bank

in a town

saving.

It

savings better

pattern

of

is assumed

instruments than

provides

cash

here

(i.e.

or

savers that

yield,

physical

with the

households/individuals

in

charac-

risk,

assets.

an

liqui-

Although

a

particular

11/ town

may

be

heterogeneous,

activity

implies

those

who

are

also

shown

planting

in deposits.

with

liquidity

during

planting

Since

its bank

•interest

rate

On

credit

costly

will

the

difficulty

funds

economic

other

a bank

Meyer

dominated

have are

Thus,

to

is,

by

This

is

and

for

operate

the

harvest will

viably

Alicbusan

(1984).

season, confronted • illiquid

harvest

season.

planting

season,

credit,

thereby

increase

•impact

on

in

deposits

season

where itself

situation

in a town.

the

deposits

their

find

entire

is

highly

Any

minimal

withdrawing

bank

is

during

demand

experience

harvest

during

low

very

to

bank

it

liquid

during

the

likely

a

11/ See

economic

activity.

situations,

the

hand, low,

is

opportunities.

savers

balances.

on

saving

during

are

all

likely

is very

idle

of

a dominant

while

too

earning

dominant

period.

of

bank

that

and

meet

profitable

for

In both

loanable

the

the

deposits,

season

foregoing

since

dominant

problem;

cannot

pattern

season, of

a surge

the

in the

existence

1.

withdrawals

a

aggregate

engaged

in Figure

During heavy

an

the

poses

this demand holding great

,

One

of

the

ways

to

deal

with

this

situation

is to

activate

a

1.2/ funds

transfer

which are

have

funds

at

area

the

least

may

one

is a net

supplier

is depicted

tothe

same

Indeed,

funds

involving

the

allocation

to

opposed

cope

transfer

funds

of

only

other

with

I.

The

more

a

Thus,

a

supplier

branch

i8 known

tO

the

savings

to

the have

temporary

mobilization

if excess

profitably

bank

throughout

bank

be sustained

operations of

to

of

funds

funds

than

can

lending

be

them

area.

transfer

areas,

market

funds

in Figure

financial

In some deposit

as

branches

objective

of

of

or

funds

problem

participation

a common

of

This

can

service

banks

branch.

wherein

_.

shown

to deficit

flow

receiver

in Figure

liquidity

bank

among

season.

area

this

other

be a net

in a rural

of

enough

in the

arise

transferred

the

on

problem

ches.

patterns

however,

liquidity

with

whose

may,

structural

out

possible

situation

This

effort

is only

with

in a rural

depending

located year,

This

elsewhere

correlBted

situated

A

a

branches

inversely

bank of

operation.

l_he

head

maximize

from

especially

those

a particular

operations branches.

demand the

In this

surplus which

can

situation,

activity

its

branches

through to are

may

credit

branch

and

profits

branch

for

a bank-wide

office

global

resources

the

are

not

and, utilize the

better

deficit

bran-

overbranched, be

sufficient

thus,

through

the

surplus

deficit

branch

12/ We

will

Rediscounting not highlight

with the Central Bank i.8 another this facility at this point.

way

out.

I

I

9

10

can

avoid

sourcing

be

relatively

more

through

deposits

external

funds

demand.

Through

to

the

bank

use as

policies and Almost

as

recognized

made

Whether

or

through

optimal

the

incurred

funds

the

the

cost

of

among

bank

to

in branches

goal

excess

with

regard

units,

the

possibly

be viewed

responding

by to

deposits

alternative

uses.

commercial

banks

funds

the

bank

is

when

any

more

of

perceives

mobilized

by

can

that of

may

funds.

obtain

efficiently

specifically

of

meet

system

to

contribution

allocation

to

which

rationing

production

management

designed

ultimate

credit

operations

profitability

a bank

were

resources

transfer

interviewed

funds

arrangements

in sourcing

more

market

all

management

minimize

money

to

at

financial

significant

not

that

Data

of

them

to

clear

MAJOR

or

procedures

the

if the

be obtained

resources

managers

rations

III.

a

allocate all

resorting

words,

and

to

perhaps,

transfer

other

external

than

internal

can

the

expensive

expenses

banks

from

cannot

and

the

In branch

or

a whole

lowering

funds

transfer as

this

to

a

opewhole.

fact,

it

maximize

is

profit

funds.

FINDINGS

from

this

Study

Questionnaire

rural

financial

study

were

which institutions

obtained was

from

the

administered

consisting

Comparative to

of

38

a

sample

branches

Bank of of

13/ commercial

and

private

development

banks

and

28

unit

banks.

13/ See design for Comparative

Lamberte (1988) for a detailed discussion on the study and a description of the contents Bank Study Questionnaire.

sampling of the

11

Almost on

all

funds

banks

transfer

branches the

unit

of

are

rural

operations

commercial

and

banks

will

(see

be

private

Annex_

limited

only

development

to

rural-based

banks

included

in

sample.

Generally, ating

in

the

the

trend

rural

of

areas

funds to

flow

the

National

percent

of

the

total

commercial

excess

funds

to

their

head

offices

located

Manila

area

This

implies

that

commercial

banks

offices.

On

the

development offices the makes

that 60

94

is

million

offices only

to

out

of

year.

but

its

funds

not

the

head

these

the

more

of

of

the

are

mother

the

KBs

branches by

to

the

head

private head

majority

offices,

funding

of

The

surplus

of

which

most

branch.

are

of

their

however, head

80

Metropolitan

total

funds

their

PDBs

the

of

the

figures

branches

as

PDBs.

of

to other than

exception

thirteen

funds

Over

transferred

the

of-

time,

from

that

but

of

branches

units

PIO0

transferred

office

i'n

transferred

funds

sample

operoffices,

I).

rural-based

percent

same

head

Table

(KB)

source

the

to say

(see

bank

73

a concentration

branches with

At

percent of

transferred

Thirteen

sample

operations

percent

There that

(PDB)

received

lending

indicate against

hand,

inconclusive

the

Region

a potential

other

same

branches

it

time

bank

in the

PDB

are

branches

urban-based

the

in 1986.

Capital

is from

specifically

p1

Discussion

one

to

branch

to other

branches,

with

million

funds

of

amounts

in

1986

their

banks

greater (see

Table

urban-based

which

branches

three

commercial

moved

as well.

received

funds

funds

than 2). head not

However, from

the

12

Table

1.

Direction

of

Type

Funds

of

Flow,

1986

Bank

Direction

Total KBs

•

PDBs

i

From

sample

branch

to:

Head Office (HO) Regional Office (RO) Other Branches (OB) HO and OB HO, RO, and OB Did not transfer Total To sample

branch

80.8 3.8 3.8 3,8 7.7

8 1 1 1 -

72.7 9,1 9.1 9.1 -

29 2 1 2 1 2

78.4 5,4 2.7 5,4 2.7 5.4

26

100.0

11

100,00

37

100.0

6 1 2 17

23,1 3.8 7.7 65.4

7 1 3

63.6 9.1 27,3

26

100.0

11

100.00

from:

Head Office (HO) Regional Office(RO) Other Branches (OB) Did not receive Total

Source:

21 1 1 1 2

Re lampagos

(1988).

=

13 1 3 "20

35.1 2.1 8.1 54.0

37

100.0

13

Table

2.

Frequency

Distribution

By Type of

of Bank,

Type

of

the 1986

Value (P)

of

Transfers,

Bank

Direction

Total KBs

< 0 1M

â&#x20AC;˘

PDBs

1

5.6

4

40

5

17.9

-

-

1

10

1

3.6

> 0

-

>lH

-

50H

8

44.4

3

30

11

39.3

>50M

-

lOOM

5

27.8

1

10

6

21.4

>IOOH

-

500H

3

16.7

1

10

4

14.3

> 500H

1

5.6

-

-

1

3.6

18

100.0

10

100.0

28

TOTAL

Mean S.D. Median Missing

Source:

Obs.

Relampagos

100,929,296 151,138,208 46,604,500 KB = 9

(1988).

60,142,400 142,420,384 18,097,222 PDB =

100.0

86,362,552 146,764,248 37,030,248 1

ALL =

10

14

head

office,

Thus,â&#x20AC;˘

and

eight

while

from

branches

five

On

two

branches

the

made made

other

to

P1 million

-

million.

the

head

other

_100 the

office,

there

were

more

funds

compared

There

is

funds

that

head

office

and

PDBs

KBs

and all

other

hand, or

Moreover,

this

bigger

loans

In transfers

the

funds

head

office for

are

Central

PDB

branches

ranging

the

from

made

gross

regional

net

transfer

to

office.

head

Four

office.

recipients

of

in

average

KBs

and

The

is

Thus,

head

office

average

and

other

PDB8.

Bank-funded

is

(i.e., that

funds

and

PDBs,

between

branches

units:

This

KBs

of

KBs

P60,266,000

due

to

the

for

fact

while

PDB loans,

(i.e.,

special

rediscounting KBs are

the

of

difference

deficit

bank-funded

suggests

for

of

to

value

a significant by

values

transferred

P108,543,856

received

fully

the

PDBs

government-funded

finding

that on

the

credit windows).

capable

of

handling

PDBs.

general, for

of

there

partly

than

were

and

of

KB loans

program$)

offices

branches

made

the

from

that

Pl10,411,369

are

to

funds

sample

these

branch

units.

p12,459,793

almost

period.

head

amounts

difference

other

values

from

of

one,

branches

However,

average

the

same

KBs.

and

respectively. the

another

of

with

one

no significant

i8

the

to

one-half

Two

PD8 branches

surplus

transferred

transfers

units

received

to

during

transfers.

office,

and

PDB branches

gross

other

head

branches

almost

funds

to

net

hand,

transferred

transfers

other

as KBs

shown is

in

Table

68 percent

2, higher

the

average than

that

value of

of .PDB_.

15

Moreover,

94

compared

to

only

Fundsâ&#x20AC;˘ head

percent

may

can

Figure

One-third dered why

the

their

poor

to the

loans,

while

loan

minimum

that

is

loan

Table

sizes 3).

that

mercial

sector

business,

Other

KBs

where

PDBB large

manufacturing

branch the

head

are

and

managers office

were

for funds

armored

interviewed

consi-

as

to

â&#x20AC;˘.

banks

and

P182,318,

minimum

loan

engage

that

comply

have

the in

transfer with

areas

minimum of

required

respectively size

toward

claimed

rural

Branches

This

operations.

large

high

branches

the

perception

in the

trading

reason

accommodate

relatively

oriented

one

This

borrowers.

to

excess

areas

prefer

borrowers

is done

But

an

balances.

the

this

office

through

requirements

small

and

who

P104,057 of

Mindanao

office.

office,

development

averaging

disqualifies

head

office

by bank

private

and

the

alternatives.

branches

in

to

area/regional

in rural

loan

Enforcement

suggests

head

excess

imposed

the

head

two

reflected

and

the

demand

bank

branches

branches

Visayas

the

managers

production

banks

to

loan

requirement

definitely

funds

branch

the

to to

the

accumulated

This

commercial

(see

most

size

these

viable

fact

small.

shows

the

branches

is due

are

of

near to

surplus

from

in

funds

directly S

indirectly

chane]led

the

are

PDB sample.

located

in areas

be transferred

the

or

are

moves

operating

vehicle.

of

branches

fuBds

turn,

KB sample

directly

For

in

branches

__

flow

surplus

which,

the

60 percent

office.

regions,

of

bank

requirement requirement urban large

of

comagri-

surplus

.management

16

_w

Head Office

. ! i

m

Branch

_

Branch =

2

Figuee 3 â&#x20AC;˘ Floe ot Funds

_

_

Branch

3

17

Table

3.

Minimum

Loan Size Requirement and Per Bank Type, 1986 (P)

Type

of

Loan

Ceilings

Bank All

KBe

1.

Maximum-AmountPer-Loan Ceiling Mean S.D. Median

2.

PDBs

604,545 479,560 500,000

2,461,111 2,478,882 1,000,000

1,143,548 1,591,683 800,000

Minimum Loan Size Requirement Mean S.D. Median

Source:

104,057 140,369 51,750

Relampagos

(1988).

182,318 207,336 100,000

127,324 164,131 100,000

18

policies.

It

ceive

transfer

funds

(SOP),

is within

whereby

the sample in of

KB

PD8

this the

branch

result

rated

by

private

the

average pared

foregoing

loans

Funds the

that

is more

and

credit

the

transfer

funds

cent

for

PDBs,

pool

rate PDBs

in the

for

pool

both

for

both

banks,

(see

Table

4).

This

this

reason.

Implied

are.

KB

conclusion

more

corrobo-

offices

of

branch

is

the

KBs

officers

of

determination.

level

than

is P2,461,111 It

can

than

also

means,

From

of

PDBs

com-

than for

from

the

branches

in

favorable

faced

with

the

deposit

average

percent

percent

The

in PDBs.

some

the

lower

KBs.

be concluded

a branch

6.5

for

power

in KBs

data,

14.1

the

branches

area.

is significantly

of

whereas

of

banks,

percent

head

have

rate

of

resources

discretionary

sePvice

percent

nine

the

ceiling

activity

are

financial

authority

operations

Fifty

that

KBs.

the

branches

of the

above

that

procedure

functions

that

shows

the

per-

decision-making

use

The

restricted

deposit-taking

deposit

for

for

against

show

higher loan

P604,545

transfer

for

the

make

the

results

granting

to

transfers

relatively

office.

in the

which

banks

for

head

managers

operating, by

emphasized

branches.

of

branch

a standard

as

findings

finding

value to only

demand

PDB

amount

have

the

control

The

that

accumulated

managers,

regard

development

PDBs

rate

with

another

determine

funds to

is the

than

as

managers,

mobilized.

regulated

on

branch

branches

being

excess

channelled

sample

context

operations

all

automatical.Iv

this

for the KBB

therefore,

effects an

interest

pure KBs

cost

and

average and

g.o

of per-

transfer

13.0

that

excess

as

percent long

as

19

Table

4.

Transfer

Pool Rates Time Deposits, (Average for

and

Interest By Bank the year,

Type

of

Rates, on Type, 1986 in percent)

savings

Bank All

KBs

1.

Transfer Rates

Pool

Mean S.D. Median 2.

14.1 2.3 13,7

Deposit ,Rates

12.0 3.1 13.0

13.8 2.6 13.7

interest

Mean S.D. Me_dian

Source:

' PDBs

Relampagoe

6.5 1 .6 6.7

(1988).

9,0 2.0 9.6

7.2 2.0 7,3

2O

the

branch

can

readily

can

transfer

Data obtained 4

-

7

loans

of

these in

extract

on

net

from

four

deposits

favorable has

a

the

of

their

This

suggests

is

sector,

less

while farm

other

seasons

encountering

of

net which

transfer

And,

fund have

throughout

structural

liquidity

determine

to

another,

have

or

sustained

the

volume

vice

versa?

a modest

rise

effort

and

the

to

the

bank net

areas

are

demand

for

their

funds

deposits are

receivers

branches

are

year.

These The

net at are conare funds

viability.

funds is

which

banks

problem. their

loans.

branches

the

It

on

agricultural.

of

Other

of

seasonality

whose

bank

suppliers

factors

branch

and

problem.

from

the

proportion

liquidity

be made

rural

than

are

and

of

the

some

These

deposits

than

sector

were

in Figures

Secondly,

in

seasons

1986

indication

deposits

lastly,

year.

must

an

seasonality

certain

the

on

a greater

operations

What one

to

at

is

branches

sensitive

can

experienced

households.

non-agricultural

in

presented

mobilization

effect

temporary

sistently

rural

bank

households.

suppliers

This

it

a profit.

basis

are

savers,

outstanding

banks

savings,

secure

at

local

observations

all

the

they

funds

banks

to

branches

Thes_

year.

visible

the

a quarterly

Several

the

that

more

credit

of

from

quarterly

almost

during

more

the

banks.

response

on

branches.

with

First,

intensification

from

bank

funds

to other

transfers

same

figures.

catering

them

together the

deposit

transferred

from

hypothesized

that

:!!I

I!

'

21

22

md

uogu_ Ul

I

I

I

I

!

_ Z D

so6ecl uolll|l/q

ul

23

0

E

,q

l't

24

â&#x20AC;˘l........

1......!.........

1....._........ r

:

-1..........,, _

+

E

rl

25

the

following

factors,

transferred/received I.

have an effect

by branch

relative

prices

loan-transaction

3.

maximum-amount-per-loan

4.

minimum

5.

collateral-loan

6.

loan default

The

decision another

transfer is

pool

higher

choose them

as

lending lending be

pool

its

service

high

deposit

that

side, deposit rate funds

to

it

is

rate,

On the

transfer the

Thus,

offered mobilized.

can be transferred

to

depositors

the

increase.

the

extend higher make

that that

the

amount

would

would

a

funds

lending

same

rate

would

with

the

Consequently, will

of

the

that

move in

hand,

hypothesized

with

hypothesized

pool

than

rate

correlated

correlated

rates

other

to

rates,

branch

rather

pool

is

lending

the

availability it

funds

transfer

then

area.

positively

interest

the

head office

hence

is

If

the

the

the

reduced.

(or borrow)

by

rates.

lending

to

and negatively

the

deposit

is

transfers

and

funds

funds

relative

deposit

determined

the

the

rate

the

of

to

in

rate,

is

and deposit

loans

of

ratio; and

rate.

more attractive,

amount

rate,

ceiling;

of a branch to transfer

rates

transferred

lending rate, deposit

costs;

branch

tranfer

fundsl.

loan size requirement;

relative

to

of

pool rate);

2.

(from)

volume

banks:

(i.e.,

and transfer

on the

the

transfer rate.

On

of-transfers

direction.

increase

can

the

availability

A volume of

,26

Transactions banks

in processing

high

lead

the

The the

is a major

applications. on

lending

of

KB8

branches

creation

of surplus

to

PDBs

power

lending

activities.

creation

of

surplus

funds

be

tested

here

is

ceiling

would

transfer

to other

A

branch

borrower. fixed

may

value loan

of size.

costs

of

the

has loan

Thus,

loan

requirement

thus,

increases

this

is

creates the

amount

is

funds

this

could

The

a

branch

to

amount cover

of

can

at

loan

per

least

the

loan

for.

documents

Thus,

those

borrowers

least

equal

to the

that

surplus funds

result

hypothesis

choosing

hypothesized

of

applications

processing

at

more

regulating

loan

that

minimum

applied

of

of

maximum-amount-per-loan

in order

amount

for

would

versa.

in

objective

it

of

vice

way

branches.

higher

involved

applied

lending

eventually

Thus,

a certain

loan

the

a

and

do

which,

by that

"selective"

is one

among

amount

require

banks

overlnead

requirement

the

branches,

Some

regardless

that

reduce

is hypothesized

in approving

its

to

considered

funds.

limit

in the

It

ceiling

decision-making

factor

induce

and

maximum-amount-per-loan

branch's as

lending

cost

among

to

on

loan

transactions

behavior

so

cost

to

funds be

a

whose minimum

higher

in the

this

minimum

branches,

transferred,

and

and vice-

versa.

High defaults. the

collateral-loan This

also

exists

collateral-loan a relationship

ratio

screens

out

requirement. between

is small It

the

expected borrowers

to who

is hypothesized

collateral-loan

reduce cannot that ratio

and

loan meet there the

27

amount

of

however, ratio

funds

cannot

volume

collateral,loan the

risk

of funds

to

the

other

is reduced

are

other

with

in the

will

of

the

a high who

leads

effect bank

of

that

borrowers

a negative the

effect

can

to

more that

lend

more

to

means

Hence,

the

amount

decline.

One

example

data

relationship,

mean

collateral.

that

insufficient

have

influence

the

is the

volume

of

funds

loan

default

rate.

including

them

deterred

us

from

is summarized

as

follows:

model.

The TF

the

would

eventually

encourages

factors

transferred/recelved.

However,

which

The

A positive

number

hand,

ratio

be transferred

There

the

requirement

On

branch.

transferred

reduces

collateral-loan

because

the

a priori.

funds

ratio

funds.

higher

of

collateral

surplus

by

be determined

on the

meet

transferred

model

= f(r D

to

be tested

, r , r , TC , LC, T L L

ML,

C/L)

where TF =

amount

r

weighted

D

=

of

funds

transferred/received.?

average

interest

rates

on savings

and

time

deposits; r

=

transfer

pool

rate;

=

weighted

average

=

cost

peso

LC

=

maximum-amount-per-loan

ML

-

minimum

C/L

=

collateral-loan

T r

TC

L

L

per

loan

lending

loan

size

rates

of

outstanding;

ceiling; requirement;

ratio.

and

all

types

of

loans;

28"

In theempirical deposits

in

1986

model, is used

more

appropriate

variable

since

it portrays

the

the

ratio

of

independent model. from

Data

on

Untalan

directly

and

from

Table These variables loan signs.

The

related the

or,

deposit

rates.

in

turn,

net

that

the

The

increases increases

transfer rate

in

the

were data

in

ratio

of

rate

shows volume funds

that

of

suggests tend

is a high

deposit

that

could

to

which the

in

all

is positively related, has

a

models

reduce that have

weighted

_deposit

funds

a highly

that

funds

variables

variable

the-

expected

ratio

in all

series

the

exhibits

pool

available

for

maximum-amount-peryielded

banks

taken

form.

Except

variable

the

were

logarithmic

dependent

go up,

obtained

Questionnaire.

which

dependent

excess

separately

variable

the

the

one

is negatively

Result

Also, as

the

and

a

used

Another

lending

result

is

tested.

rate

loan

increasing

on

of

variables

outstanding.

in

rate

runs

is

operations.

transfer-to-deposit

the

the

transferred

funds

Survey

models

rate-loan

the

of

Last effects

savers

on

thereby

ficant

to

pool on

Study

other

of

them

rest

total

This

outstanding

requirement

all

transfers.

costs

transferred.

several

size I,

The

to

variable.

lending

loan

Bank

transfers

transfer

regression

among

loan

transaction

peso

(1988).

implies

effect

cost-per-peso

lending,

treating

similarly, of

'significant

than

Model

This

amount

rather

loan

effect

models.

to

per

net

volume

rate

transfer

significant

the

pool

three

best

in

than

Comparative

minimum

ceiling

dependent

funds

cost

shows

the

the

as

of

of

Cuevas

the

5

are

the

ratio

extent

transfer

variable

the

rate

mobilized

be transferred.

to

highly is the as

the their

can

be

signiaverage offered which,

/

29

Table

5.

Parameter

Estimates of Factore Affecting Funds Transferred, All Banks,

of

Variable

Model

I

Model

II

the 1986

Model

Volume

III

i

Oonstant

6.312 (0.451)

Transfer pool to-lending ratio

raterate

Weighted average deposit rates

Cost-per-peso outstanding

7.009 (0.781)

1_.376 (3.576)***

7.586 (3.466)***

8.297 (3.231)***

2.609 (0.982)

4.580 (2.311)**

4.209 (1.807)*

1.130 (2.944)**

1.047 (3.044)***

0.933 (2.700)**

loan

Collateral-loan

Minimum loan requirement

-0.968 (-0.105)

ratio

-1.323 (-0.942)

-1.327 (-1.049)

-

-0.317 (-0.451)

-0.001 (-0.001)

-

size

Maximum-amount-perloan ceiling

Dummy 0 = PDB 1 = KB _2 R F-Star

0.155 (0.214)

-

-4.546 (-2.710)**

-3.192 (-2.698)**

-0.529 (-0.872) -4.171 (-2.749)***

0.671

0.649

0.604

5.672***

7.175,**

6.789,**

Note: (1)

Dependent

variable:

Net

(2) Figures in parentheses 10_; **significant at 5_; (3) Not all the sample because of the absence included in the model.

Model III= 20 obs.

Source:

Relampagos

(1988).

transfers-to-total

are the t-statistic. ***significant at I%.

deposits

ratio

*significant

at

banks are included in the regression runs of information in some of the variables Model I = 17 obs.; Model II = 21 obs.;

3O

The not

collateral-loan

significant

dropping size

in Models

the variables

requirement,

obtained

ficient

I and II.

collateral-loan

sign,

although

The dummy variable which means

to deposits

III,

after

minimum

ceiling

loan

variable

still not statistically

in all runs has a significant

Lastly,

at one percent

relationship

ratio and

although

sigcoef-

that PDBs have higher net .transfers relative

than KBs.

significant

sign,

But in Model

the maximum-amount-per-loan

the correct

nificant.

ratio has the expected

between

the F-statistics

level implying

the explanatory

a

of all models

strong

variables

are

statistical

and the dependent

variable.

Table deposit and

a

mobilization

unit

values

6 shows the

banks.

zero

for

significant more

deposit

rates

coefficients,

In unit

and

This

model

I,

banks

and one for implying

than loan not

unit rates

statistically

similar

to

percent

with

It

banks weighted

expected

the

banks

included

banks.

The

of

branch

yielded tend

to

average positive

significant.

log since

a

This zero

The result obtained

result when a dummy variable

pool rate coefficient level.

is

branch

the

form

both

pool rate is used.

in each of the unit banks.

one

branch

that

.have

assigned

The transfer

logarithmic

includes

banks.

into natural

the previous

in

a dummy variable

If, the transfer

transformed

runs

Model

deposits

although

In Model not

model.

coefficient

mobilize

was

regression

is positive

It is important

variable value

is

here

is

is

used.

and significant

to note that

pool -rate in this case acts as a dummy variable.

the

at

transfer

That is why the

31

Table

6.

Regression

Results, Deposit All Banks, 1986

Variable

Model

Constant

-4.366 (-1.667)*

Weighted average deposit rates Loan

rates

Transfer

pool

rates

Mobilization

I

Model

II

-4.026 (-1.608)

0.266 (0.532)

0.254 (0.517)

0.915 (1.346)

0.815 (1.243)

-

Dummy variable 0 = unit banks 1 = branch banks

Node1,

0.067 (3.019)***

0.985 (2.937)***

-

_2 R

0.138

0.146

F-statistic

3.351.*

3.519.*

Note: (a)

Dependent

(b)

No.

(c)

Figures in parentheses 10_; **significant at

Source:

of

variable:

observation:

Relampagos

Total

deposits

-

total

assets

ratio

45

(1988).

are the t-statistic.

5_; ***significant

at

*significant 1_.

at

32

results

of

results

is the

on

the

banks

the two

partly

more

IV.

POLICY

The banks

of

and in

to

deficit

transfer of

branch

banks

of

in the

funds

same

in the

operations

branches

Thus,

banks

Implied

commercial tend

service

transfer

to area

mechanism.

study

show

where

where small

operations

of

allocate

how

banks most

branches

deal

with

borrowers

loans

are

the

branch

commercial

the

are

deemed

bank-wide

of

problem

of

considered

less

unprofitable.

banking

The

system

resources

from

â&#x20AC;˘

allow

surplus

to

branches.

an

benefit _mpe_us

development . savings. areas,

funds

for

branches

banks

branches

to

are

funds

other

from

Regardless

deposit

their

areas

efficiently

The as

and

the

development

rural

transfer

banks

of the

availability

of

private

credit-worthy funds

funds

banks. unit

same.

IMPLICATIONS

results

operating

efforts

than

the

the

of the

development

deposits

because

basically

effect

mobilization

private

mobilize

are

favorable

deposit and

models

branches service

not

faced areas.

of

intensify of

since

transfer

the

The

of

is that banks

efforts

seasonality

can

with

commercial

their

worried

they

operations

to funds

flow

rural

possible

always

resort

to

reverse

â&#x20AC;˘private rural

having

level

and

mobilize

about

high

it serves

in outlets

moving

of

demand

for

is true

in the

case

for

them

to

credit

in

of

deficit

branches.

The commercial

major

contributions

banks

and

private

of

funds

transfer

development

banks

operations should

among

therefore

33

be

considered

in

the

present

all,

policymakers

the

situation

on

the

The

credit

In

light

10_i_ies

need

retention

of to

returns

on

credit

to the

accomplished RFIs

liquid

structural throughout funds

to

cheapest transferred invitation %

at

one

the

study,

the

of

against

source.

That

their

to

fine

are

against need

government

but

bank

banks.

urban

policies

so

Thus,

trade,

price

rural

economic

to

reconsidered.

as

to and

This,

of

not

be

are

season,

the

or

liquidity to

funds

direct

from rural; an

the areas

centers

is

effect

economy-wide

fiscal

activities

flow

they

be allowed

in

is

Whenever

excess

obtain

of

It

should

at another

branches

to the

the

i.e.,

have

or

allocation

this

of

should or

profit

increase

they

banks,

branches.

to

illiquid

deposit

of

maximize

problem,

uses,

funds

of

the

better

viability

tune

be

to

aims

i.e.,

most

withdrawal

objective

deficit

liquidity

thenthey

excess

the

through

the

profitable

in

certain

system,

and

the

which

viablefirst.

sector,

problem,

most

be

the

operations

Specifically,

flows

season

period,

changes.

unprofitable

this

government

temporary

structural biased

of

surplus

expense

liquidity

to

to

cash

the

with

of

programs

their

have

banking

at the

extend

improving

between

government

RFIs

branch

from

Most

consistency

is that

rural-agricultural

experience

highly

line

works

that

important

re-examined.

present

understandable

sector.

various

directly

resources

at

to

results

be

policies-aimed

greater

and

bottom

the

in the

financial

for

programs,

scheme

especially net

aim

rural

intermediaries

areas.

subsidized

of

the

policies

financial

rural

of

should

rural-agricultural call

formulation

open

poTicies

that

making

them

thereby together

with

the

34

removal of the deposit

retention

more

liberal branching

their

banking services

The deposit work

against

Compelling resources even

projects

investment

banks

to intensify

obtain

attractive

One shortcoming deposit

them

losers

would

government

interest of

funds

the

of

transfer

financed

to saying

efforts

be

if

appropriate linkages KBs

and

operations.

they

returns.

cannot

is the inefficient may

One

forego

of

of

undertakings.

in other areas which

transfer considered

which

these

perception

investment

banks

that

by banks to meet

This may alter the

as

deposit

a

better

could

the be

use

have

groups

of

offered

by

rates on deposits.

funds

should

strengthen

branches

net

sector of

be

also

savings.

total

be the surplus units who will not

rural-agricultural

to

time option

higher

policies

viability,

will

returns from their

The absence banking system

their

of this scheme, therefore,

banks attractive

expand

may

rural

area is tantamount

their deposit-taking

investment

earned

Perhaps,

of banks to mobilize

quota.

funds, over

-alternative

if it perpetuates,

to invest 75 percent of

worthy

the required

of

scheme,

in the same service

less

banks to

of a

in the rural areas.

efforts

banks

the introduction

policy, can attractmore

retention

the

policyand

operations seriously

aim to increase and,

policy

here

among PDBs in

in

credit

at the same time,

rural-based

other

However,

in

to

to

themselves

the

in

ensure

up the the

institutions.

encourage

areas.to

unit

framing

supply

financial is

the

unit

and/or effect

agri/agra

banks with

interbank requirement

35

and Also, the

retention

deposit the

single

bank's

with

borrower's

unimpaired

excess

branch

as

banking

transfers

would

the

port

profitability

patterns,

the

requiring to

Ironically,

this

deficit

unit

of

etc.,

non-agricultural

be

of

economic

a natural

from

experience.

law!

This

funds

is

pursued.

in

only

can

provision roads,

raise

the

micro-enterprises. cash

of

be

regard,

the

lawmakers,

their

a

flow

would

of

loanable

retrogression.

for the removal

of

The experience

of

with

loan

formulating

repeats

Here,

good

among

is rapidly growing.

happens

the

In this

certainly

considered

economic

activities

of RFIs.

It is said that history

not

such

effect

heterogeneous

country as well as of other countries

policies.

to

electricity,

to lend at least 3 percent

should

or

removing

be seriously

is gaining popularity

requirement

banks

banks

non-agricultural

as

to the viability which

of

unit

unit

banks

this comes at a time when support

regulations

15 percent

Thus,

/_/

base having

micro-enterprises

the agri/agra

at

Can hinder

communication,

seasonality

banks

set

them.

such

economic

thinking,

is

development.

trade and price facilities,

of rural-based,

inconsequential

funds

allow

development

facilities,

broader

current

be.

to

infrastructures,

adequate

a

may

in the rural areas should

rural

With

to

benefit

aside from appropriate of

lending

case

policies

greatly

Finally, activities

the

which

and surplus

from

such

impede

limit

capital

funds

banks,

restrictive

policies

itself.

portfolio laws

and

But this

when men refuse

to

learn

14/ should

However, be retained.

the

single

borrower

limit

to

non-bank

is

borrowers

References

Blanco, Rhenee and Richard Meyer.

"Rural Deposit Mobilization in. the Philippines, 1977-1986".

A Paper Presented at the Workshop" "Financial Intermediation in the Rural Sector" Research Results and Policy Issues" held at the Central Bank, Manila on 26-27 September 1988.

Cohen,

Kalman J. and Chun H. Sam. "A Model for Bank Holding Companies".

Autumn 1979.

Lamberte, Mario Comparative

Low-Income PID._ Workin_

Review 1987,

of

B. Bank

"Sampling Study-

Linear Programming Journal ofLBa_k

Design Technical

and Questionnaire Notes" (1988).

Planning Res.ffarch,

for

the

and Ha. Theresa Bunda.

"The Financial Markets in Urban Communities The Case of Saoang Palay" Paper Series No. 88-05.

March 1988. and Joseph Literature,"

Lim.

"Rural PIDS Staff

Financial MarKets" A Paper Series No. 87-02,

Lapar,

Ma. Lucila and Douglas Graham.

"Credit Rationing Deregulated Financial System."

A Paper Presented Workshop: "Financial Intermediation in the Rural Research Results ana Policy Issues" held at the Bank, Manila on 26-27 September 1988.

Magno,

Marife and Richard Meyer.

"Scope and Performance of Credit Guarantee Programs in the Philippines, A Paper Presented at the Workshop" "Financial Intermediation in the Rural Sector" Research Results and Policy Issues" held at the Central Bank, Manila on 26-27 September 1988.

Mayne,

Lucille and their 1980.

Meyer,

Richard and Adelaida Alicbusan.

Undermininq Rural Development, with PressLondon, 1984).

Relampagos, Mobilization Thesis.

1988.

Sacay,

S. "Funds Affiliates".

Julius Amon_ University

Orlando J. Meliza Small Farmer Credit

Transfer Between Bank Holding Journal of Bank Research.

"Farm-household Cheao Credit.

P. Funds Transfer Branch Banks in the of the Philippines

H. Agaoin, and Dilemma.

Manila,

Under a at the Sector Central

Companies Spring,

et al.

(West View

Operations and SavinQs Rural Areas, M.A. School of Economics,

Chita rrene E. TBAC, 1985.

Tanchoco.

38_

Store,

Bernell K. for Efficient Autumn, 1980.

and Ned C. Hill.

Cash Concentration,"

"Alternative Cash Methods: Evaluation Frameworks," Spring 1982.

Technical Board for Agricul.tural and Incentives Structure February, 1981.

_, Tolentino, V. Philippine Sociology

Th_Farm Manila:

and PCAC,

of

Credit.

Rural

"Cash

Transfer Financial

Transfer J#urnal

of

Scheduling Manaqement,

Mechanisms and Bank R_arch.

"A Review of Subsidies Banks" TBAC, Manila.

the_Household: 1981.

Th_Microworld

Bruce J. "Current Imperatives and Developments Agricultural Credit Policy", Economics Occasional Paoe_No. 1324.

March 1987.

of

in and

Untalan, Teodoro and Carlos Cuevas.

"Transactions Costs of Banks and the Viability of Rural Financial Intermediaries".

A Paper Presented at the Workshop: "Financial Intermediation in the Rural Sector: Research Results and Policy Issues" held at the Central Bank, Manila on 26-27 September 1988.

39

ANNEX

Sample

The

targetted

provinces: Sur,

66

Pangasinan,

Iloilo,

classified

Negros below

banks

were

Nueva

Ecija,

Oriental,

according

to

types

Branch

Unit

of

_mb_r

from

Laguna,

and

Classification

Type

selected

Misamis of

Batangas, Oriental.

banks.

Sample

Banks

Percentage

Banks

(1)

KBs

27

40.9

(2)

PDBs

11

16.7

(1)

RBs

23

34.8

(2)

PDBs

5

7.6

Banks

Total

66

the

100.0

following Camarines These

are