MANILA, Oct. 20 (PNA) — The Monetary Board (MB) has approved major amendments to the regulations governing credit-risk taking activities of banks and quasi-banks (B/NBQBs) following a comprehensive policy review undertaken by the Bangko Sentral ng Pilipinas (SP).
The amendments seek to fundamentally strengthen credit risk management in these financial institutions in line with global best practices and Basel Core Principles for effective bank supervision.
Under the enhanced regulations, the critical role of the Board of Directors and Senior Management in promoting a prudent and sound credit environment in their organization is emphasized.
The credit risk management framework should be comprehensive and cover the entire process end-to-end, from credit policy strategy to credit underwriting to credit administration to maintaining the appropriate control environment.
On the back of strong credit risk management, banks stand to gain greater flexibility to extend credit, innovate credit products, and develop lending programs.
The new rules are also based on proportionality principles that allow BSP supervised FIs to adopt appropriate credit risk management practices commensurate to their size, scale, complexity.
The revised rules focus on sound credit underwriting and administration practices. Cash flow analysis and ability-to-pay play central roles in determining borrower’s creditworthiness. B/NBQBs are also afforded the flexibility to use financial data or information deemed relevant in their credit evaluation provided these are properly documented.
By focusing primarily on cash flow and ability to pay, BSP is signalling that collateral should only play a supporting role in credit decisions. This regulatory point of view is expected to give banks more leeway to lend to customers who are creditworthy but may not necessarily have collateral, particularly real estate, which could unduly restrict access to credit.
Under the new rules, loans will also be considered secured up to the extent of the unencumbered estimated value of the net proceeds at disposition of the offered collateral, provided that such collateral has an established market and a sound valuation methodology.
This principle-based definition creates greater flexibility in accepting a broader range of assets as possible collateral. However, in the case of real estate mortgage as collateral, the maximum loan value for regulatory purposes shall be capped at 60% based on an appraisal acceptable to the BSP. This maintains existing regulations already applicable to UKBs.
The collateral value cap will be particularly relevant in securing DOSRI transactions and in potentially accelerating the setting up of allowable loan for losses in case a loan account gets distressed.
The BSP clarified that the cap on REM collateral value is not the same as a loan-to-value ratio limit imposed in some jurisdictions for real estate lending which is synonymous to a minimum borrower equity requirement.
Under both existing and revised rules, the minimum borrower equity requirement is bank-determined internal policy. Current industry practice is a minimum equity requirement reportedly averaging around 20 percent. However, under the enhanced guidelines, such internal policy will be subject to close regulatory scrutiny as to whether the borrower equity requirement of a bank is prudent given the risk profile of its target market.
The framework also supports and enhances the growth and development of start-up and micro and small enterprise borrowers by exempting them from the required submission of income tax return/audited financial statements during the first three years of their operations or banking relationship, thereby improving their access to finance.
Moreover, any borrower with outstanding loans not exceeding Php 3.0 million is likewise exempted from the said documentary requirements.
For loan renewal or extension of maturities, banks are required to re-evaluate the creditworthiness of the borrower to establish clear evidence of the sufficiency of cash flow to support the renewal. A policy on “clean-up” or minimum payment of principal will likewise have to be in place.
Consistent with sound corporate governance practices, clear internal policies in handling transactions with directors, officers, stockholders, their related interests (DOSRI), the bank’s subsidiaries and affiliates, and other related parties, are required to be formally articulated and implemented by the banks to ensure that no stakeholder is unduly disadvantaged. These policies shall cover standards that require directors and/or officers to avoid placing themselves in a position that creates conflict of interest or the appearance of conflict of interest and to fully disclose any personal interest that they may have in credit transactions.
All banks and quasi-banks are also required to develop internal credit risk rating systems appropriate to the nature, size and complexity of their credit activities (i.e., internal credit risk rating system for banks with complex transactions, simple grading system for banks with simple credit operations, and credit scoring models for certain retail credits).
The rating systems should be able to sufficiently differentiate grades (creditworthiness) among borrowers based on capacity and willingness to pay and other quantitative and qualitative factors. FIs are also expected to come up with appropriate validation and stress testing policies as well management information system to capture credit risk exposures across the different business segments and on- and off-balance sheet activities.
Banks will also be required to develop and document a sound loan loss methodology that reasonably estimates provisions for credits in a timely manner, conform to certain objective criteria that are articulated in the policy, adequately documented to permit a third party review, and is based on expected loss model and the FIs’ historical loss rates and experienced credit judgment. FIs with simple credit operations can opt for the standardized simplified loan-loss provisioning mechanism also prescribed under the revised regulations.
Finally, banks shall be required to define limit structures for their credit exposures and employ portfolio diversification strategies to mitigate credit concentration risk. Large exposures to third parties of the bank and its subsidiaries and affiliates shall now be aggregated and compared with the group’s qualifying capital, and counterparties connected either through control ownership or economic interdependencies shall be treated as a single counterparty. Banks are expected to generally observe a lower internal single borrower’s limit (SBL) than the prescribed limit of 25% of the bank’s net worth as a matter of sound practice.
To facilitate transition, banks are called upon to perform a gap analysis of their current practices vis-à-vis the new rules within six months from the effectivity of these regulations and to propose an action plan duly approved by the board of directors to achieve full alignment with the enhanced credit risk management framework and migrate to the new system within a reasonable period of time but in no case longer than two years from the effectivity of the regulations. (PNA)