MANILA, Philippines – The Bangko Sentral ng Pilipinas (BSP) has raised the ceilings on the exposures of subsidiaries and affiliates of banks to priority programs particularly infrastructure projects needed to support economic growth.
The central bank said the Monetary Board has increased the exposures to subsidiaries and affiliates of BSP supervised financial institutions in projects under the Philippine Development Plan / Public Investment Program (PDP/PIP) to encourage more investments.
The exposures to subsidiaries and affiliates in PDP/PIP projects will now be subject to higher individual and unsecured limits of 25 percent instead of 10 percent and 12.5 percent instead of five percent of the net worth of the lending bank, respectively.
“This is to encourage more entities to participate in PDP/PIP related initiatives to ultimately contribute to continued economic growth,” the BSP said.
The higher limits were part of the amendments to selectively ease restrictions on lending to directors, officers, stockholders, and related interests (DOSRI), affiliates, and other related parties for priority programs under the PDP/PIP approved by the BSP.
In 2011, the National Economic and Development Authority (NEDA) rolled out 1,900 PIP projects worth P4.2 trillion under the 2011-2016 PDP.
The central bank said the policy change is consistent with the BSP’s thrust to allow BSP supervised financial institutions (BSFIs) to take on risks based on their risk bearing capacity and quality of risk governance.
BSFIs are expected to have a good understanding of the nature of the projects under the PDP/PIP, the nuances of the financing needs of these initiatives, and the risks arising from the exposures.
Moreover, since these are transactions with related parties, BSFIs should have robust internal policies and procedures in handling related party transactions, and in ensuring that these transactions are conducted on an arm’s length basis.
Under the new rules, loans extended to DOSRI for project finance (PF) are exempt from complying with the ceiling on unsecured loans during the pre-operational phase of the project.
According to the BSP, the ceiling would only be applied once the project becomes operational.
However, supervised institutions are required to adopt strong measures designed to safeguard the interests of the financial institution, which may include, but are not limited to, pledge over the borrower’s shares, assignment over the borrower’s assets, assignment of all revenues and cash waterfall accounts, and assignment of project documents.
It added the Monetary Board also approved the fine-tuning of the definitions of “related interest” and “affiliates” to effectively calibrate the prudential requirements with the degree of potential abuse in the relationship.
Relationships arising from common ownership and concurrent directorships are redefined putting emphasis on the ability of the concerned owner or director to exercise control in the borrowing entity.
“This is in view that a controlling interest in the borrowing entity may already be reasonably perceived to influence the exercise of judgment in the approval and regular review of the loan to such entity,” he said.
Following this principle, cases wherein the common director is an independent director or a director holding nominal share in the borrowing entity are considered as transactions with counterparties who are not related to the BSFI.
The new policy also amended the capital treatment of exposures to affiliates as both the secured and unsecured loans granted to affiliates will now be risk weighted.