The Monetary Board (MB) approved the amendments to selectively ease restrictions on lending to directors, officers, stockholders, and related interests (DOSRI), affiliates, and other related parties to support the financing of productive sectors and projects that are considered as priority programs under the Philippine Development Plan (PDP)/Public Investment Program (PIP).
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 RPTs, 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. The said ceiling will only be applied once the project becomes operational. BSFIs are, however, 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.
The revised rules also increased the prescribed limits for loans granted to subsidiaries and affiliates undertaking projects under the PDP/PIP. This is to encourage more entities to participate in PDP/PIP related initiatives to ultimately contribute to continued economic growth. Exposures to subsidiaries and affiliates in PDP/PIP projects shall be subject to higher individual and unsecured limits of 25 percent and 12.5 percent of the net worth of the lending bank, respectively, as compared with the ceilings previously set at 10 percent and 5 percent.
The MB likewise 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. 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. Previously, the unsecured loans granted to affiliates are deducted from qualifying capital for purposes of determining the capital adequacy ratio. The revised rules provide that both the secured and unsecured loans granted to affiliates will now be risk weighted.
Alongside these amendments, the BSP expanded its menu of enforcement tools such that it may now direct BSFIs to deduct from capital all credit exposures to their related parties that are not engaged on arm’s length basis. The capital deduction will apply to both secured and unsecured exposures. The said enforcement action aims to ensure effective implementation of the new rules and to promote responsible lending to related parties.