May 25, 2024

Government financial institutions (GFIs) are not properly addressing financing gaps and should be reorganized to better fulfill their mandates to cater to the underserved markets, particularly agriculture and small enterprises, according to an expert.
Dr. Mario Lamberte, team leader of University of the Philippines Public Administration Research and Extension Services Foundation Inc. Regulatory Reform Support Program for National Development, in a recent online talk said studies show that, first, there is a need for GFIs to address market financing gaps, as he focused in particular on the roles of the Development Bank of the Philippines and Land Bank of the Philippines.
Lamberte noted a large portion of DBP’s loan portfolio is allocated to financial and insurance activities, which weakens its development role.
Data also indicated the agricultural sector, which LBP should be catering to, has a smaller share in its loan portfolio compared to other sectors, Lamberte said.
Both DBP and Land Bank’s loan portfolios also do not seem to put more emphasis on lending to micro, small and medium enterprises (MSMEs), he continued.
A second observation is that in times of crisis, including the global financial crisis and the Covid-19 pandemic, GFIs in the country generally behave like private banks rather than performing a countercyclical role to help out struggling entities, Lamberte said.
A countercyclical fiscal policy refers to the steps taken that go against the direction of the economic or business cycle.
“So you have a GFI that is behaving like private banks during crisis episodes when in fact they are very much needed during those crises. In other jurisdictions, the GFIs play a big role. In fact, in Japan, GFIs have so-called crisis response plans built into the portfolio of the GFIs so in case there’s a crisis they can respond quickly,” Lamberte said.
Meanwhile, a third observation is that in terms of competitive neutrality, Lamberte said findings bear out that regulations and practices “confer undue advantages to GFIs over private financial institutions.”
Competitive neutrality is the recognition that significant government business activities which are in competition with the private sector should not have a competitive advantage or disadvantage simply by virtue of government ownership and control.
Lamberte noted GFIs are designated depository banks of all government agencies under Department of Finance Circular 01-2017.
The national government’s implicit guarantee of a “safe haven” status to GFIs also confers a competitive advantage to them. Implicit government guarantee refers to the probability that the government will bail out an entity or institution in case of a default.
He recommended “we should reorganize both GFIs” by clarifying their identities. “Our proposal is to make DBP as an infrastructure bank and Land Bank as bank for agriculture and MSMEs,” noting that these niches have been overlooked by the private sector.
Lamberte said DBP should provide structured financing and other services for infrastructure projects falling under key sectors such as energy, information and communication technology, construction, transportation, urban development and industrial sectors.
Land Bank should then be focused on supporting agriculture and MSMEs, including startups.
Lamberte added there is a need to de-politicize GFIs, adding that there should be no ex-officio or government officials on the board. The board of directors should also have a fixed term of at least three years, and the board should have a free hand in hiring top management and employees.
He further suggested that GFIs assume a countercyclical role in times of economic crisis, and such a role must be explicitly included in their mandate. There should also be a trigger mechanism and exit strategy for using countercyclical fund.
Finally, he emphasized the importance of implementing the competitive neutrality policy. The Governance Commission for Government Owned and Controlled Corporations and Philippine Competition Commission should draft a joint memorandum circular outlining competitive neutrality principles, indicators, evaluation and actions. Department of Finance Circular 01-2017 should at the same time be amended to adhere to the policy, he said. – Press release