BSP approves new rules on single borrower’s limit

The central bank’s Monetary Board has approved amendments to banks’ single borrower’s limit (SBL) on credit risk transfer (CRT) arrangements and also expanded the definition of capital to make it more flexible.

Bangko Sentral ng Pilipinas (BSP) Governor Felipe M. Medalla said the revised Circular No. 1164, first approved as a resolution on Dec. 27, 2022 and signed on Jan. 5, will take affect on July 1, 2023. The six-month transition period is enough time for banks to comply with the new SBL rules.

“The policy enhancements aim to make the BSP rules more responsive to evolving business and credit risk management practices,” said Medalla on Friday, Jan. 6. “This is a timely measure since it provides banks with flexibility in utilizing effective credit risk mitigation techniques which would allow them to prudently expand credit exposures in line with growth of the economy,” he added.

The amendments are mainly on the CRT arrangements, as well as the expansion of the definition of capital which the BSP explained is used for determining compliance with varied prudential limits, including the SBL.

From time to time, the BSP increases the SBL cap or grants separate SBL but as a general rule, banks and non-banks should spread their risks.

Based on the circular, CRTs are any arrangement that allows the bank to transfer the credit risk associated with its loan or other credit accommodation.

As for the definition of capital, the BSP said the term capital is synonymous to unimpaired capital and surplus, combined capital accounts and net worth, and the total of the unimpaired paid-in capital.

The new regulations revised the definition of regulatory capital, which is used as base in computing the SBL, among other prudential limits. The BSP said this will now include other instruments which may be likened to preferred stocks, subject to certain criteria such as but not limited to minimum maturity of five years. “This provides a bank with more options as regards the types of instruments that it can use to boost capital to back up growth in its lending and investment activities,” it said.

The BSP said the revised circular aligns the BSP regulations with internationally recognized standards on CRT and globally accepted rules on trade and finance transactions.

The amended SBL rules have the minimum operational requirements for a CRT arrangement to be considered as effective. “These are patterned after the credit risk mitigation requirements of the Basel III capital standards which ensure that a particular CRT arrangement is binding on all parties, legally enforceable in all relevant jurisdictions, as well as direct, explicit, irrevocable, and unconditional, among others,” said the BSP.

The BSP likewise explained that the rules recognize guarantees between a bank’s head office and its branches or between a bank’s branches located in different jurisdictions as an effective CRT, subject to certain conditions. “The documentation of such intrabank guarantee must be issued in accordance with internationally recognized rules on finance transactions where the bank’s head office and branch are treated as separate entities with respect to the payment of such obligation. Moreover, the total amount of the intrabank guarantees must not exceed 100 percent of the total loan portfolio of the Philippine bank concerned as of the end of the preceding month,” said the BSP.

Since the revised rules allow controls, Medalla said the BSP can dispense prior approval requirements on CRT arrangements for exclusion from the SBL.

“The removal of the prior BSP requirement upholds BSP’s expectations for banks to exercise sound risk governance and be primarily responsible for managing credit risk on their exposures. It also streamlines the lending process of banks allowing them to readily support the financing requirements of the country,” said Medalla.

While undergoing a transition period, the BSP directed banks to continue to use the existing SBL framework as of end-December 2022 to “minimize disruption in the lending operations of banks.”

“The said SBL framework also includes the use of 30 percent SBL by all banks, and the grant of exposures by covered foreign bank branches at amounts which shall not exceed the 30 percent SBL using as reference point 2x the level of their prescribed regulatory capital,” said the BSP.

The BSP first issued the circular in draft form in November 2021.