Regulators said the rules of the Bangko Sentral ng Pilipinas (BSP) on unsafe and unsound practices would be tightened further to include aggressive deposit-taking and offering expensive loans to low-quality borrowers.
Prompted by the failure of at least 15 rural banks around the country in the last two months, the BSP said it is issuing a new circular that would expand the list of bank practices that are considered unsafe and unsound.
According to BSP Deputy Governor Nestor Espenilla, most of these prohibitions are implicit in existing BSP rules but regulators decided to make them explicit, with specific quantitative markers for banks and examiners to follow.
“The idea is to warn banks engaged in these activities that we are probably going to be more aggressive in issuing cease- and-desist orders (CDOs) if we find them engaged in unsafe and unsound activities,” Espenilla said.
“Obviously, we are drawing from the lessons of the recent past where several banks were shut down,” he added.
Espenilla said the BSP would now classify aggressive deposit-taking as unsafe and unsound practice, based on specific criteria approved by the Monetary Board.
“If a bank is following this as a business model, then we would consider that as unsafe and unsound,” Espenilla said. “That would include offering extremely high interest on deposit as well as offering non-cash rewards that are disproportionate to the deposits.”
Espenilla said the BSP also included as unsafe and unsound the practice of disproportionate lending to low-quality borrowers and charging high interest rates.
Espenilla said some banks have been found extending expensive loans to borrowers that other institutions would not consider credit-worthy. Although not unsafe by itself, he said banks that do this too much would be putting their institutions at risk.
“We have set quantifiers to determine what is too much, how much is too high and so forth,” he said. “That way, banks would not be able to do this to the extent of risking their entire business.”
According to Espenilla, there were borrowers that would accept exorbitant interest rates on loans especially if no other institution would lend to them.
“Even worse, they would accept these loans because they have no plans of paying anyway,” he said. “So banks over-lend to desperate borrowers and they both collapse.”
Espenilla said the new BSP rules on unsafe and unsound practices would be applicable to all Philippine banks.
The move, was prompted by the collapse of at least 15 banks including the so-called Legacy Group which was found engaging in aggressive deposit-taking, at times offering cars as a non-cash bonus for new depositors.