The Bangko Sentral ng Pilipinas (BSP) has issued guidelines on banks’ treatment of expected credit losses (ECL) in their books and reminded them to apply prudence in making credit decisions in the time of COVID-19 pandemic.

 The guidelines as provided under Memorandum No. M-2020-061 is part of the BSP's effort to determine the true health of the banking system.

The BSP said uncertainties due to the health crisis created challenges in how banks report ECL methodology under the Philippine Financial Reporting Standards (PFRS) 9, especially with the mandatory grace periods provided for in the Bayanihan Act and in the regulatory relief measures granted by the BSP. With the pandemic, the “existing assumptions, scenarios, and forecast being used for ECL provisioning may no longer hold in this current environment.”

BSP Deputy Governor Chuchi G. Fonacier, who signed Memorandum No. M-2020-061 covering the “Supervisory Expectations on the Measurement of Expected Credit Losses and the Treatment of Regulatory Relief Measures Granted Amid the Novel Coronavirus Disease 2019 (COVID-19) Pandemic” last Monday, said banks should be guided by the “supervisory expectations on the measurement of ECL” as specified under PFRS 9, “considering the uncertainties brought about by the COVID-19 pandemic.”

Fonacier said the supervisory expectations on the treatment of the mandatory grace period during the quarantine lockdowns and the BSP relief measures are also as guided in the memo.  

She said that for one, BSP-supervised financial institutions availing of its relief measures should exclude eligible loans from past due and non-performing classifications and two, to “stagger the booking of allowance for credit losses (and to) continue to report actual past due and non-performing loans and allowance for credit losses in the financial reporting package and capital adequacy ratio reports.”

“This is to facilitate the generation of industry statistics and provide the BSP with information on the true health of the banking system,” said Fonacier.

The memo, among other things, enjoined banks to adhere to the guidelines on credit risk management, besides being guided in the treatment of relief measures for the purposes of determining ECL, and treatment of relief measures granted by the BSP.

In the memo, the BSP said banks should have the same prudence in assessing the financial capacity of borrowers and in making credit decisions, under the credit risk management rules.

Banks, stressed the BSP, “should be able to distinguish borrowers who are only facing temporary cash flow pressures from those with serious issues on capacity to repay the loan.”

“Decisions to grant new loans or to modify the terms of existing loans should be based on sound assessment of the financial profile of the borrowers. Cognizant that the COVID-19 pandemic has affected the cash flows of households and businesses, BSFIs should conduct a comprehensive assessment of the impact of the pandemic on the loan portfolio,” said the BSP.

Banks, which are expected to review ECL in view of the impact of the pandemic, are also expected to: use reasonable and supportable information about past events, current conditions, and the forecast of future conditions/and or outlook, without undue cost or effort; and to exercise prudent judgment in determining the qualitative and quantitative factors that should be considered in measuring ECL as well as in applying overlays or adjustments to the model.