By Joann Santiago
MANILA, Oct. 30 (PNA) — Moody’s Investors Service on Thursday dubbed as credit positive the latest regulation of the Bangko Sentral ng Pilipinas (BSP) putting a cap on the value of real estate collateral.
In a statement, the debt watcher said the new regulation “will strengthen credit risk management and tighten bank lending standards.”
“The new regulation is credit positive for Philippine banks because it will require them to cap the value of real estate collateral and will accelerate loan-loss provisioning for distressed loans,” it said.
It also pointed out that this new regulation will “reduce banks’ credit risk concentration among borrowers in interconnected industries.”
Under the new rules, the value of real estate collateral will only be 60 percent of its appraised value.
The balance of 40 percent of the loan will be considered unsecured loans, thus banks need to increase their loan provisioning funds.
The new rules also expand the definition of large exposures, which now include the financial institutions’ credit exposure to parties connected to each other by way of ownership or economic interdependencies.
Moody’s said “the expanded large exposures definition will limit banks’ exposure to related borrowers whose credit exposures are highly interconnected, such as in the case of real estate lending, where banks are exposed to real estate developers, contractors and other suppliers whose credit risk is linked to the real estate sector.”
Earlier, BSP Governor Amando Tetangco Jr. said there is a need to lower the weight of collateral on loans to check on the financial institutions’ credit risk management quality and to align the rules with international standards.
“Rather than promoting mere compliance with detailed regulations, the focus will be on assessing the quality of the internal credit environment from end-to-end,” he said.
Tetangco said “prudent lending should be primarily based on solid analysis of creditworthiness and quality of cash flows.”
He added that “by discouraging obsession with collateral, the new regulations promote better access to credit by those who are not necessarily collateral heavy but do have the ability to pay from business operations or other regular cash flows.”
Moody’s noted that since “most Philippine banks are already exposed to real estate through their large conglomerate owners and loans to their affiliates, which are also leading players in the real estate market, we expect the new regulation to limit banks’ exposure to real estate and related sectors.”
”The limit, in combination with the stress test, will protect asset-quality amid property price volatility,” it added. (PNA)