The Bangko Sentral ng Pilipinas (BSP) has approved temporary measures – additional single borrower’s limit (SBL) and zero reserves requirement -- to incentivize banks to release sustainable loans.

BSP Governor Eli M. Remolona on Saturday, Dec. 16, said the BSP will continue to “play an active, enabling role in fostering the transition towards a sustainable economy.”

The additional measures for sustainable finance will be implemented for two years in the form of extra lending capability and reduced reserve requirement rate on sustainable bonds issued by banks. While both measures will be available to banks for a period of 24 months only, the BSP could still conduct regular reviews as “warranted by circumstances” in case they need to reassess the perks or maybe to extend validity of the incentives for green lending.

“We will identify and create appropriate incentives that are within our mandates empowering the banking system to steer capital flows toward growing green or sustainable investments and accelerate the development of solutions addressing just transition and adaptation-related challenges,” said Remolona.

Remolona signed BSP Circular No. 1185 for the “Grant of Additional Single Borrower's Limit for Financing Eligible Projects and Zero Peicent Reserve Requirement Rate Against Sustainable Bonds” on Dec. 13. The circular was disseminated over the weekend.

The Monetary Board, BSP’s policy-making arm, approved additional temporary measures to encourage and incentivize banks to finance more investments focusing on green or sustainable projects or activities such as transition financing for decarbonization.

Based on the new circular, banks are allowed to extend loans for eligible green or sustainable projects or activities with a top-up 15 percent SBL.

The BSP said eligible projects or activities must meet any of the principles or eligible categories of projects as stated in the following: the 2022 Strategic Investment Priority Plan on Green Ecosystems, Health and Food Security; Republic of the Philippines Sustainable Finance Framework; Philippine Sustainable Finance Guiding Principles; ASEAN Taxonomy for Sustainable Finance; or Philippine Sustainable Finance Taxonomy Guidelines.

“The underlying project or activity should be legal and compliant with any Philippine environmental laws and regulations. An activity or prohibited activity may still be considered an eligible exposure if the same is an enabler of climate change mitigation,” said the BSP.

In addition, the central bank said banks are expected to adhere to the credit risk management guidelines, including the management of credit concentration risk, as well as adopt controls to protect their financial interest like the use of insurance or negative pledge covenant. The existing credit ceilings to related parties of banks or separate SBL for project finance are not covered by the regulatory incentive, it said in the statement.

The other major incentive made possible by the new circular is the reduction in the applicable reserve requirement rate for green, social, sustainability or other sustainable bonds issued by banks.

The BSP said the reserve requirement will be gradually reduced to zero percent from the current three percent.

Based on the circular, this will be done as follows: a 200-basis point (bp) reduction in the first year from effectivity of the policy; and an additional 100 bps reduction in the succeeding year for another 12 months.

“Such bond issuances should comply with the appropriate regulations of the Securities and Exchange Commission and/or other relevant regional or international standards acceptable to the market including but not limited to the issuances of the International Capital Markets Association or endorsement of the ASEAN Capital Markets Forum,” said the BSP.

It also said that the issuing banks should also comply with the disclosure requirements in the Sustainable Finance Framework and not engage in greenwashing.

“The gradual and calibrated reduction in the reserve requirement rate for sustainable bonds does not constitute a change in the monetary policy stance but is envisioned solely to be a tool to promote sustainable finance,” the BSP reiterated.

The BSP conducted an ad hoc survey of the industry last year. Based on the survey, 75 percent of universal and commercial banks have financed or approved loans supporting green or sustainable projects totaling P830 billion and $14 million as of end-June 2022. These loans accounted for seven percent of the banking system’s total loan portfolio during the period.

In the analysis “Integrating sustainability in the BSP’s loans and credit operations”, part of the first BSP Sustainability Report released in July, the central bank said a survey it conducted also revealed that local banks have a strong preference for incentives such as reduced rediscount rates and higher collateral and/or loan value as incentives to promote green lending among banks.

Another survey listed at least nine green or sustainable loan categories that banks seem to prefer as green lending such as renewable energy, sustainable water and wastewater management, energy efficiency and green buildings.

Loans for renewable energy accounted for 89 percent of approved loans as of the third quarter of 2022. Next with a share of 56 percent are loans to sustainable water and wastewater management while energy efficiency and green buildings have 50 percent each as share in the loan portfolio.

Other activities which accounted for 39 percent include projects promoting social welfare, socioeconomic empowerment, affordable infrastructure, access to essential services, and microfinancing in underserved communities.

Meanwhile, other categories which gets the most of green financing include: promoting resource efficiency and circular economy; sustainable or zero-carbon transportation; promoting resilient food systems; pollution prevention and control; and transition activities.

In conducting more surveys, the BSP can collect and analyze more data to integrate environmental, social and governance (ESG) aspects in its credit operations.

As for reviewing the perks such as rediscounting loans, the BSP said economic activities or projects acceptable under the BSP Rediscounting Facility will be closely monitored and assessed if these are “legitimately sustainable” based on the country’s carbon-reduction commitments and “properly categorized as eligible or ineligible for the incentive.”

Last June 2022, the BSP conducted a survey among selected central banks to find out which approaches have been done in embedding sustainability-linked components in their existing lending facilities.

According to the survey, providing lower interest rates to banks to finance green or sustainable projects and activities at lesser cost is the most common incentive given by central banks.

In another survey, the BSP was able to gather current lending practices for green or sustainable projects and to ask banks if they are interested in availing of BSP credit facilities.

The BSP’s maiden Sustainability Report has committed to complete the climate stress tests, disclosure guidelines and incentives for sustainability-related projects in 2023.