To bolster the country’s climate resilience, the Bangko Sentral ng Pilipinas (BSP) has proposed a major regulatory shift, slashing the credit risk weight for sustainable housing loans.

Under the new draft circular, the risk weight for these eco-friendly financing arrangements will drop to 20 percent, a sharp decline from the 50-percent weight currently applied to standard individual housing loans.

This proposed rule, which seeks industry feedback until April 17, aims to urge the banking sector to support environmentally conscious residential projects.

By lowering the “credit risk weight”—the amount of capital a bank must set aside against a loan—the BSP said it is providing a financial incentive for banks to favor sustainable developments over traditional ones.

Such a policy is rooted in the country’s environmental challenges, noting its “[high vulnerability] to climate-related hazards, with households and residential assets increasingly exposed to physical risks such as flooding, typhoons, and extreme heat.”

Anchoring the country’s climate resilience at the household level is seen as a major component of the national adaptation agenda.

According to the BSP, the current domestic market for sustainable housing loans remains “nascent” and limited in scope, even as the need for such housing rises. This, the BSP said, warrants “targeted regulatory measures to encourage market development.”

To incentivize the banking sector, the BSP intends to use “differentiated capital treatment,” which means it will assign a lower credit risk weight to specific loan categories, such as sustainable housing.

“By introducing a differentiated capital treatment, the measure aims to incentivize increased lending for climate-resilient housing, support the mainstreaming of household-level climate action, and contribute to the achievement of the Philippines’ nationally determined contributions (NDCs),” the BSP said.

The Philippines’ NDCs refer to its climate action commitments under the Paris Agreement, which include an unconditional commitment to reduce greenhouse gas (GHG) emissions by 2.71 percent and a conditional target of up to 72.29 percent by 2030 relative to business-as-usual levels.

To qualify for the lowered risk weight, a loan must be secured by a first mortgage, and the property must be occupied by the borrower. The property must also meet specific green criteria, such as energy efficiency, water conservation, or physical climate resilience.

These resilience measures are defined by the BSP to include architectural and site-specific improvements.

Under the draft rule, the property “should incorporate climate resilience or adaptation measures designed to reduce exposure or vulnerability to physical risks, such as elevated floor levels or any flood protection, improved drainage, or cool or reinforced roofing.”

Other eligible features include the installation of on-site renewable energy (RE) systems, such as rooftop solar photovoltaic (PV) panels, and rainwater harvesting systems.

Once adopted, this new policy is expected to provide the “regulatory clarity” banks need to design and market these products effectively.