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By Melissa Luz T. Lopez

BSP eases lending restrictions

Posted on June 15, 2016

THE BANGKO SENTRAL ng Pilipinas (BSP) has moved to allow banks to extend bigger loans to related parties engaged in big-ticket state infrastructure projects in a bid to free up more funds for productive use.

However, lending to bank directors, officers, stockholders, and related interests (DOSRI) must still be at “arm’s length,” with the BSP still vigilant for “sweetheart deals” that would involve irresponsible lending.

In a statement yesterday, the central bank said its policy-making Monetary Board has raised the limits for banks in terms of lending funds to related parties that are taking on projects identified under the government’s Philippine Development Plan and Public Investment Program (PDP/PIP).

“Exposures to subsidiaries and affiliates in PDP/PIP projects shall be subject to higher individual and unsecured limits of 25% and 12.5% of the net worth of the lending bank, respectively, as compared with the ceilings previously set at 10% and 5%,” the central bank said in its press statement.

“This is to encourage more entities to participate in PDP/PIP-related initiatives to ultimately contribute to continued economic growth.”

The National Economic and Development Authority crafted the PDP and PIP which spell out investment targets from 2011 to 2016 to help achieve the goal of inclusive growth under Pres. Benigno S.C. Aquino III, who ends his term this June 30.

Some P2.471 trillion worth of infrastructure development makes up more than half of the P4.186 trillion in total investments targeted under the PDP and PIP which were updated in 2014.

The national government shoulders 80.2% of total costs through revenues, loans, and grants, with the private sector picking up the tab for the balance.

The government has sought to tap the private sector in its bid to make infrastructure development catch up with a fast-growing economy, as highlighted by the launch of the public-private partnership program in the third quarter of 2010 after the Aquino administration took office.

Under the relaxed rules, loans extended to related parties for project financing will not be subject to the ceiling for unsecured loans while the project is in pre-operational phase, the BSP said. It is only when the project is in full swing that the loan will be covered by such limit.

The new rules also raised limits for loans granted to subsidiaries and affiliates undertaking PDP/PIP infrastructure projects.

However, banks must still subject loan applications from related parties to internal risk management protocols to comply with rules introduced by the BSP last December to prevent so-called sweetheart deals that could imperil their financial position. In particular, banks and other supervised financial entities must adopt “strong” measures to protect their financial footing before granting any loan, such as a pledge over the borrower’s shares, assignment over the borrower’s assets, assignment of all revenues and cash waterfall accounts, and assignment of project documents.

The BSP also fine-tuned definitions of “related interest” and “affiliates” in order to calibrate prudential requirements with the perceived degree of potential abuse.

“Relationships arising from common ownership and concurrent directorships are redefined putting emphasis on the ability of the concerned owner or director to exercise control in the borrowing entity,” the central bank explained.

“Following this principle, cases wherein the common director is an independent director or a director holding nominal share in the borrowing entity are considered transactions with counterparties who are not related to” BSP-supervised financial institutions.

And to promote responsible lending, the BSP said banks have to deduct from their capital any credit extended to DOSRI which did not observe the “arm’s length” rule.

A number of local banks are owned by conglomerates, some of which are also engaged in infrastructure development under the PPP scheme. These include listed BDO Unibank, Inc. and China Banking Corp. which are both owned by the Sy family’s SM Investments Corp.; Metropolitan Bank and Trust Co. and its subsidiary Philippine Savings Bank under taipan George S.K. Ty’s GT Capital Holdings, Inc.; Ayala Corp.’s Bank of the Philippine Islands (BPI); Aboitiz Equity Ventures, Inc.’s Union Bank of the Philippines; East West Banking Corp. of the Gotianun’s Filinvest Development Corp.; Rizal Commercial Banking Corp. of the Yuchengco Group of Companies; Robinsons Bank Corp. of Gokongwei-led JG Summit Holdings, Inc.; Asia United Bank of the Rebisco group; the San Miguel Corp. group’s Bank of Commerce; and Philippine National Bank of Lucio C. Tan’s LT Group, Inc.

The economy stands to gain from the relaxed lending rules, a bank economist said when sought for comment.

“The move of the BSP will help spur investment in projects related to infrastructure, one of the biggest stumbling blocks to unlocking our nascent growth potential,” said Nicholas Antonio T. Mapa, research analyst at BPI.

“The single-borrower’s limit (SBL) as well as the limits on DOSRI have been noted as challenges faced by the investor community,” he added.

“Most of the companies in the Philippines are part of a conglomerate and this will help facilitate getting much-needed infrastructure projects off the ground, without increasing default risk given the BSP’s still strict adherence to risk-based metrics.”

Since 2004, the BSP has enforced SBL equivalent to 25% of bank capital. However, it allowed firms involved in the government’s PPP projects to borrow 25% on top of their limit starting 2010.