The Monetary Board, the policy making body of the BSP, approved the rationalization of limits on the exposure of universal/commercial banks (U/KBs) to the real estate industry by imposing a single 20 percent overall limit on their real estate lending. The new limit, which primarily serves as a prudential safeguard against overconcentration of credits of U/KBs to commercial lending, is expected to provide them with more flexibility in delivering credit to high priority areas, such as infrastructure development and construction of residential properties.
Under the new rules, loans for the construction of public infrastructures are now excluded from the definition of real estate loans (RELs) and consequently from the 20 percent loan limit. From a risk management perspective, public infrastructure projects like roads, bridges and railways have a very different risk configuration relative to commercial property development which is more susceptible to speculative motivations.
Housing loans to individual households, regardless of amount have also been excluded from the limit, as well as loans extended to real estate developers for the construction of socialized and low cost residential properties under various government housing programs. This is to sustain the government’s National Shelter Program aimed at addressing the country’s chronic housing shortage but without prejudice to the Bangko Sentral’s prudential stance considering that said loans shall continue to be subject to the strict underwriting standards and the prescribed limits on loan amount that may be granted relative to the value of collateral. Meanwhile, RELs to the extent guaranteed by the Home Guaranty Corporation (HGC) or collateralized by non-risk assets shall continue to be excluded from the said limit.
The new rules also exempts from complying with the prescribed RELs limit the trust department of banks because apart from observing the “prudent man’s rule” in administering, holding and managing the funds and properties of the trustor, the trustee-bank does not really assume credit risk. The assets received in trust or in any other fiduciary capacity are administered in accordance with the terms and conditions of the trust or fiduciary agreement.
Thrift banks and rural/cooperative banks whose traditional market niches are residential RELs/ mortgage financing and agricultural/cooperative loans, respectively, are not subject to said loan limits.