BSP issues new policy measure on banks’ overdraft credit lines

The Bangko Sentral ng Pilipinas (BSP) has issued a new policy measure providing cover to the central bank for overdraft credit lines being converted into emergency loans for troubled banks.

The Monetary Board of the BSP approved the new policy guidelines governing the handling of overdraft of banks in their demand deposit accounts with the central bank.

BSP Governor Amando M. Tetangco Jr. explained that the new guidelines would allow banks participating in the clearing operations of the Philippine Clearing House Corp. to apply for an overdraft credit Line (OCL).

The OCL is a short term credit facility intended to tide over a bank experiencing an unexpected or higher-than-usual volume of inward transactions. 

Banks that avail of the OCL, Tetangco explained, might be allowed to remain outstanding up to a period of five consecutive days at an interest rate of 1/10 of one percent per day or the prevailing 91-day T-bill rate plus three percentage points, whichever was higher. 

“It is not intended for the purpose of providing a credit facility which a bank experiencing liquidity problems may avail itself on a long-term or medium-term basis,” Tetangco said.

Tetangco said banks would be able to apply for the OCL on a fully secured basis up to a maximum amount equivalent to 50 percent of their demand deposit liabilities or the loan value of offered collaterals, whichever was lower.

“The new policy measure is intended to provide temporary liquidity assistance and to cover the BSP exposure in case the OCL is converted into an emergency loan,” Tetangco said.

On top of the secured overdraft line, Tetangco said banks participating in the clearing operations of the Philippine Clearing House Corp. would be given a clean overdraft line equivalent to 10 percent of their approved rediscounting line.

“It will give a sufficient time for banks to align their clearing operations with the new policy,” he said.

Short term finance helps banks manage temporary cash flow shortages associated with normal seasonal fluctuations in their business cycle. The facility is generally used to fund increases in current assets such as stock, debtors, and the like or the payment of peak or unexpected operating expenses.

The BSP overdraft is a revolving credit facility that allows banks to draw funds, up to an agreed limit — an ideal short term financing tool with no fixed repayment schedule.