The Bangko Sentral ng Pilipinas (BSP) has released the proposed implementing rules and regulations (IRR) of Republic Act (RA) No. 11293 or the “Philippine Innovation Act” to dispense loans and other financing activities for the innovation development of 11 priority sectors including finance, energy, security and defense.
In a draft IRR currently being circulated among banks, non-banks and other industries, the BSP issued an updated proposal after more than two years of public and private consultations where it detailed the innovation development credit for qualified borrowers; required allocation; modes of compliance including consolidated compliance; reporting requirements; and penalty provisions.
The BSP also issued two separate draft circulars and a memorandum for the IRR’s guidelines and adoption. Banks and non-banks and other industry players are given until Oct. 17, 2024 to submit feedback and recommendations to the BSP for the proposed IRR, circular and memo.
Specifically, the circular is about the minimum four percent mandatory credit allocation for innovation development while the memo is addressed to all banks with innovative programs, activities, and projects eligible for compliance with the credit allocation.
The law’s concept of innovation is the “creation of new ideas that result in the development of new or improved products, processes, or services, which are then spread or transferred across markets”. Innovation development is the research and development of new technologies, product innovation, process innovation, organizational innovation, and marketing innovation.
The BSP, the National Innovation Council (NIC) which developed the National Innovation Agenda and Strategy Document (NIASD), identified 11 sectors for innovation development such as: learning and education; health and well-being; food and agribusiness; transportation and logistics; energy; blue economy and water; finance; manufacturing and trade; public administration; security and defense; and others as may be deemed relevant by the NIC.
Based on the IRR and proposed circular, the required allocation for innovation development credit for banks is at least four percent of their total loanable funds. The credit quota will still be subject to a joint review by the BSP and NIC after three years of IRR effectivity. The findings will be reviewed by Congress.
Qualified or eligible borrowers for innovation development credit includes micro, small and medium enterprises (MSMEs); startups; innovation centers; business incubators and other entities that facilitate and support the development of new technologies; product innovation; process innovation; organizational innovation; and marketing innovation.
“In extending innovation development credit, banks shall observe the credit risk management guidelines, including the assessment of creditworthiness and repayment capacity of borrowers, as provided under BSP regulations,” said the BSP.
Based on the draft rules and guidelines, there are two modes of compliance. Banks may comply with the mandatory credit requirement via direct compliance or through the many channels for alternative compliance.
Direct compliance involve loans granted to qualified borrowers after Aug. 6, 2019 for innovation development while allowable alternative compliance are loans and/or investments that are granted/purchased after Aug. 6, 2019. The law was approved in 2019.
Allowable alternative compliance are the following: investment in bonds issued by the Development Bank of the Philippines and Land Bank of the Philippines to be used exclusively for onlending for innovation development; investment in debt securities for innovation development; loans to, or investments in financial entities, excluding banks, that provide supply chain financing for MSMEs aimed at supporting the growth and development of an innovation ecosystem that promotes MSME digitalization and participation in the local and global value chains; and loans to, or investments in projects and companies offering/providing technology-based solutions to MSMEs for purposes of promoting e-commerce, including, but not limited to, alternative data credit scoring, digital accounting and booking applications, production, marketing and distribution, and tax compliance online tools.
Other modes of alternative compliance include: investments in crowdfunding platforms for MSME financing; loans or investments in the form of sustainable finance instruments to finance any of the eligible green or sustainable projects that contribute to innovation development; and sustainable finance instruments to include but are not limited to green or sustainable loans, green bonds, social bonds, sustainability bonds, blue bonds, pandemic bonds, catastrophe bonds, transition bonds, sustainability-linked bonds or loans, and other sustainable finance instruments.
The IRR and circular also listed investment in the equities of startups as alternative compliance; wholesale lending granted by banks to financial institutions that provide financing for MSMEs that develop or produce innovative goods and services, including for innovation development; rediscounting facility granted by banks to other banks covering eligible credit exposures; and syndicated loans granted to finance eligible credit exposures.
The BSP proposed strict sanctions for non-compliance or under-compliance. The applicable monetary penalties for non-compliance or under-compliance will be computed as one-half of one percent of the amount of non-compliance or under-compliance and will be directed towards innovation development.
The BSP will likewise slap monetary and non-monetary sanctions on banks and its officers “as may be necessary” for delayed or amended reports and “for false/misleading statements and other acts violative of the banking rules and regulations.”
About 90 percent of the total penalties collected on non-compliance and under-compliance will be remitted to the BSP’s Innovation Fund. The remaining 10 percent of the total penalties will be used to cover BSP’s administrative expenses.