The Bangko Sentral ng Pilipinas (BSP) is still working on including sustainable projects or “green” financing as part of banks’ compliance to the revised Agri-Agra law.
BSP Governor Felipe M. Medalla said the inclusion of funding green finance as Agri-Agra compliance is part of measures to incentivize the financing of sustainable projects.
“We hope to get the necessary revisions in the Agri-Agra Law so that sustainable finance can form part of compliance with mandatory credit to the agri-agra sector,” said Medalla.
A new law was recently enacted which is consistent with the Agri-Agra law. Republic Act No. 11901 or the “Agriculture, Fisheries and Rural Development Financing Enhancement Act of 2022” lapsed into a law last July.
Medalla has vowed to efficiently and effectively implement RA No. 11901 to help the agricultural sector recover from the impact of the pandemic. Considered a new Agri-Agra law, it provides a comprehensive financing framework for the development of the involved sectors, and it also enhance access of rural communities and agricultural and fisheries households, including their micro, small, and medium enterprises (MSMEs), to financial services and programs.
Basically, the new Agri-Agra law expanded agricultural credit and rural development financing to include agri-tourism, digitalization of agricultural activities and processes, public rural infrastructure, programs that promote health and wellness of rural communities, and activities that improve livelihood skills.
The law also promotes financing toward environmental, social, and governance projects, including green projects that support sustainable and inclusive economic growth. However it does not include these sustainable projects as banks’ alternative compliance to the Agri-Agra law.
Basically under the new law, the BSP said banks are no longer required to allot 10 percent of their lending portfolio for agrarian reform beneficiaries and 15 percent for agricultural activities. The law now provides banks with more flexibility in allocating the combined 25 percent mandatory credit or quota to a range of borrowers in the agriculture, fisheries, and agrarian reform sectors.
Last month, the BSP issued proposed rules and regulations that will govern the mandatory agriculture, fisheries and rural development or AFRD financing under RA No. 11901.
The draft circular said BSP expects banking institutions to design and offer financial products and services that “suit the specific requirements of their agricultural clients, taking into account their cash flows and the gestation and harvest period of the agricultural produce/activity/project being financed.”
AFRD financing refers to loans and investments to increase agricultural sector productivity and competitiveness, and fund rural areas’ sustainable development.
Prior to the new law, banks’ loanable funds for agriculture and agrarian reform credit continue to fall short of the mandatory allocation.
Bank lending to the agricultural sector totalled P847.95 billion as of end-June this year, up by 7.4 percent compared to same period last year of P789.66 billion.
The amount fell short of the mandated credit alloted as agricultural loans in the Agri-Agra law. Of the P847.95 billion, banks’ direct compliance totaled P436.07 billion while alternative compliance under the law amounted to P411.89 billion during the period. Based on BSP data, banks should have loaned P822.34 billion as direct compliance and P1.23 trillion as alternative compliance to the previous Agri-Agra law.
As of end-June, banks compliance to Agrarian Reform Credit which should be 10 percent of their total loanable amount of P8.22 trillion, was only 0.78 percent. Meantime, the percentage or ratio of compliance to the 15 percent other agricultural credit was only 9.53 percent.
Meantime, the BSP, to encourage funding of green finance, has already released three important regulations on sustainable finance.
It has issued Circular No. 1128 released on Oct. 26 2021 on the Environmental and Social Risk Management or ESRM Framework and Circular No. 1149 issued on Aug. 23 this year covering the Guidelines on the Integration of Sustainability Principles in Investment Activities of Banks.
Last month, Medalla said he is hoping the number of banks with sustainable financing will increase after the release of Circular No. 1149 which are the rules on green investments.
Circular No. 1149 is the third phase of sustainable finance regulations. The guidelines cover banking book investments or debt and equity securities portfolios that are not being traded by the bank as part of its proprietary position.
The first and second phases of regulations set out the expectations on the integration of sustainability principles in banks’ core strategies, governance, and risk management frameworks, especially in the areas of credit and operational risks. These rules also embed the principle of proportionality, which takes into consideration a bank’s size, risk profile, and complexity of operations.