BSP urges banks to exercise prudence in extending loans to local government units

MANILA, Philippines - The Bangko Sentral ng Pilipinas (BSP) has cautioned banks against excessive loans extended to local government units (LGUs) by complying with the limits set by the Department of Finance (DOF).

BSP Deputy Governor Nestor Espenilla Jr. has issued Circular Letter 2012-030 setting the limits on borrowings LGUs as established by the finance department’s Bureau of Local Government Finance (BLGF).

“All banks are directed to adopt and adhere to the policy limits set by the DOF through the BLGF in granting loans and credit accommodations to the LGUs,” Espenilla said in the circular.

As part of its due diligence, he pointed out that banks should require LGU borrowers to submit Certificate of Net Service Ceiling and Borrowing Capacity issued by the finance department’s BLGF.

The BLGF is mandated under Republic Act 7160 or the Local Government Code of 1991 and its implementing rules and regulations to assist the DOF in the formulation and execution of policies, rules, and regulations governing local taxation, real property valuation or assessments, and the conduct of the financial affairs of the local governments; and in the exercise of administrative and technical supervision over local treasury and assessment offices and their respective operations.

It is also tasked to issue appropriate instructions or directives to local treasury and assessment officials relative to the enforcement of policies, rules and regulations; provide consultative services and technical assistance to the local governments and the general public on local taxation, real property assessment and other related matters; and administer the DOF components of foreign-assisted projects involving local governments and the Municipal Development Fund established under Presidential Decree 1914.

The Local Government Code authorized LGUs to issue bonds as an alternative means of raising funds for local projects.

Unlike traditional LGU fund sources such as IRA, loans and grants, municipal bonds could be used only to finance self-liquidating development projects since the source of repayment comes from cash flows generated by the project itself.

BLGF officer in charge Salvador del Castillo said in a letter to the BSP that the agency issues Certificate of Net Service Ceiling and Borrowing Capacity to LGUs as no legal authority to impose a cap on LGU borrowings.

“It may be more feasible for the government financial institutions, private banks, and other lending institutions to exercise prudence in the grant of loan to LGU taking into consideration their paying capacities and the viability of projects to be funded from the proceeds of the loan,” del Castillo stated in the letter dated February 7.

He added that Section 324 of the Local Government Code of 1991 did not provide a limit as to amount an LGU could borrow but the maximum debt service allocation in the local budget is pegged at 20 percent of its regular income.

He explained that the law stated that both the existing and proposed loan amortization should in no case exceed 20 percent of the current estimated annual income of LGUs plus internal revenue allotment (IRA) for the current year.