BSP relaxes cap on property loans

The Bangko Sentral ng Pilipinas (BSP) has raised big banks’ limit on their real estate lending to 25 percent from 20 percent to increase credit to the property sector especially to household borrowers but the banks will have to comply with rigid stress testing for risks monitoring. 

“The increase translates to additional liquidity for real estate lending amounting to around P1.2 trillion based on end-March 2020 numbers,” according to BSP Governor Benjamin E. Diokno. 

The 25 percent real estate loan limit on universal and commercial banks is applied to total loan portfolio net of interbank loans. As of end-June this year, banks’ lending to real estate activities amounted to P1.719 trillion, higher than same time in 2019 of P1.471 trillion, based on BSP data. 

Based on the new rule, the universal and commercial banks and their subsidiary thrift banks will also have to comply with the Real Estate Stress Test (REST) limits, after assuming a 25 percent write-off of real estate exposures. These are 10 percent Capital Adequacy Ratio (CAR) and six percent Common Equity Tier 1 capital ratio. It is the same CAR for thrift banks that are not units of large banks, and six percent for Tier 1 ratio. 

“Under the new guidelines, the methodology for computing a bank’s REST limits was revised to exclude residential real estate loans to individuals for own occupancy and foreclosed real estate property,” said the BSP in a statement. 

The REST limits are considered soft limits and the BSP said a bank could have exposures to real estate “for as long as it is able to demonstrate ability to manage risks.” The new guidelines also “reinforce this approach by relating assessment of risks by a covered bank on its real estate exposure to its Internal Capital Adequacy Assessment Process or capital planning process. This ensures that a holistic approach is adopted by banks in the management of their risks vis-à-vis their capital position.” 

Diokno said in July that asset price inflation continue to be manageable despite excess liquidity provided by the BSP during the COVID-19 pandemic. 

Diokno has said that equity and property prices are supported by market fundamentals and that the stunted economic activity since mid-March because of the lockdown have dampened asset price movements.

The BSP chief also said that bank lending will pick up in the coming months with the economy’s gradual reopening and as such, the “easing of credit demand and tighter credit standards reduce the likelihood of asset price inflation due to a credit boom.”

It was in 2008 when the BSP imposed a single 20 percent overall limit on big banks’ real estate lending. The limit was implemented to prevent the overconcentration of credits of the large lenders to commercial lending.

There are exemptions to the BSP’s rule that limits real estate loans such as housing loans and loans to real estate developers of socialized and low cost housing under the government programs.   

Thrift banks, rural and cooperative banks are also not subject to the loan limit because their traditional market are residential real estate loans or mortgage financing, as well as agricultural and cooperative loans. 

Since loans for public infrastructure construction is not part of real estate loans as a category, infrastructure development such as roads, bridges and railways is not covered by the loan limit imposed by the BSP on real estate lending by banks, but subject to other risk management policies.

In a recent survey of banks’ loan officers, the BSP said that due to a reduced risk tolerance, banks have tightened their lending standards in the second quarter this year – breaking 44 quarters in a row of unchanged credit standards – amid low loan demand while the economy and businesses are still restricted by lockdowns.

In the meantime, there are other prudential safeguards in place to prevent credit booms and asset price bubbles besides the cap on real estate loans and loan-to-value ratio. The BSP also implements a rigorous stress tests for the real estate sector and close monitoring of prices via the Residential Real Estate Price Index (RREPI).

The latest RREPI showed that residential real estate prices went up by 12.4 percent in the first quarter, higher than same time last year of 10.2 percent.