The empirical analysis has shown that monetary policy has non-neutral effects on the lending behavior of smaller rural banks. While big rural banks are able to protect their lending portfolio from contractionary monetary policy by the size of their balance sheet, small rural banks with less diversified funding portfolio cannot. Moreover, highly capitalized rural banks are more inclined to protect their capital than expand their lending portfolio, following monetary tightening
and higher capital requirement. The insignificance of GDP growth may reflect weakness in effective loan demand and lack of diversification that could have also impinged on the earning capacity of rural banks, as supported by initial estimates on the drivers of rural bank profitability. The finding on non-neutral effects lends credence to the principle of proportionality embodied in the BSP’s regulatory framework.
