Banks should be more flexible in assessing borrowers’ financial difficulty

Published October 22, 2021, 3:59 PM

by Lee C. Chipongian

Despite the numerous regulatory relief measures granted to all banks to cope with the impact of the pandemic, banks are not extending the same reprieve to both new borrowers and those with modified or restructured existing loans even after establishing that these borrowers’ financial difficulty are only temporary and lockdown-related.

In a memo which will be implemented until end 2022, the Bangko Sentral ng Pilipinas (BSP) wants its supervised financial institutions (BSFIs) to have a “more flexible and systematic approach” when modifying the terms and conditions of borrowers’ loan agreements during the pandemic, especially borrowers whose cashflow problems will return to normal when mobility restrictions are lifted.

The BSP released the new guidelines because with the lingering pandemic-related economic uncertainty, households and businesses’ income, cashflows, and financial position will continue to be affected by COVID-19 issues.

“In this respect, the BSP expects BSFIs to grant relief measures to their borrowers to reduce their debt burden and ultimately contribute to economic recovery. These relief measures include, among others, modifying the terms and conditions of the loan agreements to reflect the change in the borrowers’ projected cash flows and improve the probability of full collection,” said the BSP.

BSP Deputy Governor Chuchi G. Fonacier, who signed BSP Memorandum No. M-2021-056 on Thursday, Oct. 21, said that loan modification “should be targeted at providing sustainable support measures to creditworthy borrowers experiencing financial difficulty to help promote overall loan quality and contribute to broader economic recovery.”

BSP Deputy Governor Chuchi G. Fonacier

Instead of managing their expected credit losses (ECL), what is happening is that most banks especially large lenders and thrift banks, are applying stringent, inflexible and even unreasonable requirements for borrowers affected by the public health crisis.

Fonacier said that to guide BSFIs’ treatment of restructured loans for purposes of measuring ECL, banks must establish “prudent criteria” in assessing and modifying the loan terms and conditions. The memo provides guidance on the ECL treatment of loans particularly consumption loans, and in classifying the accounts as bad loans.

“The classification of modified loans under Stage 1, 2, or 3 for purposes of determining the ECL shall be based on the assessment of the extent of financial difficulty of the borrowers and their ability to fully pay the loan based on the revised terms,” she said.

The new guidelines on the regulatory treatment of restructured loans for ECL management will be effective until December 31, 2022.

Based on the guidelines, in assessing any significant increase in the credit risk, banks should modify the contractual terms of the loan in a flexible and systematic approach and to “monitor the changes of the risk of default of the concerned borrowers at both the portfolio and individual levels as new information emerges, as well as evaluate the effectiveness of the relief measure extended.”

Classifying modified loans into stages (Stage 1, 2 and 3) to determine ECL will be based on the assessment of the extent of financial difficulty of the borrowers and their ability to fully pay the loan based on the revised terms, said the BSP.

The BSP also said that restructured loans should not be automatically considered as “credit-impaired” and classified as a non-performing loan.

The central bank said BSFIs should “holistically assess” borrowers’ repayment capacity, revised cash flows, and financial position, especially for borrowers whose financial difficulty is only temporary or “paying capacity can reasonably be expected to return to levels allowing full payment once COVID-19 restrictions are lifted.”

 
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