What is rediscounting?
Rediscounting is a privilege of a qualified bank to obtain loans or advances from the Bangko Sentral ng Pilipinas (BSP) using the eligible papers of its borrowers as collaterals. It is a standing credit facility provided by the BSP to help banks liquefy their position by refinancing the loans they extend to their clients.
How does the rediscounting cycle go?
A bank extends loans to end-user borrowers who execute credit instruments [i.e., promissory notes (PNs), drafts or bills of exchange] in favor of the bank. The bank rediscounts the credit instruments of its end-user borrowers with the BSP by endorsing the same in favor of the BSP. The BSP, in turn, lends the bank an amount equivalent to a certain percentage of the face amount/outstanding balance of the end-user borrower’s credit instrument. The bank may use the proceeds of the BSP loan for new loans to other borrowers, or to address its liquidity needs. In effect, the rediscounting cycle helps sustain the bank’s funds for relending to its borrowers and, at times, service withdrawals.
3. What is the role of rediscounting in our monetary system? Section 81 of Republic Act (R.A.) No. 7653, otherwise known as the New Central Bank Act, provides that the rediscounts, discounts, loans and advances, which BSP is authorized to extend to banking institutions, shall be used to influence the volume of credit consistent with its objective of maintaining price stability. During periods of inflation, the BSP shall limit the loans it extends to banks. On the other hand, the BSP makes full use of the credit operations authorized under its Charter whenever there is a need to expand money supply in our monetary system. Thus, rediscounting is one of the monetary tools of the BSP to regulate the level of liquidity in the system.
Please join StudyMode to read the full document