Just before the close of 2022, the Monetary Board approved the amendments to the provisions of the Manual of Regulations for Banks (MORB) on credit exposure limits to a single borrower as well as the definition of capital for purposes of determining compliance with prudential limits and requirements.
Section 362 of the MORB limits the total amount of loans, credit accommodations, and guarantees that a bank may extend to any person to no more than 25% of the net worth of such a bank, subject to the increase under subsection b thereof. This is also known as the Single Borrower’s Limit (SBL) as it intends to limit or restrict a bank’s risk of exposure to single borrowers by preventing banks from extending large credit accommodations to one borrower or a group of related borrowers. The basis for determining compliance with the SBL is the total credit commitment of the bank to the borrower.
Under Bangko Sentral ng Pilipinas (BSP) Circular No. 1164, series of 2023 (the Circular), capital was redefined to refer to unimpaired capital and surplus, combined capital accounts, and net worth, and the total of the unimpaired paid-in capital, including paid-in surplus, retained earnings, and undivided profits. The following are added to capital:
1. Deposits for stock subscription recognized as equity pursuant to Section 123 of the MORB; and,
2. Other instruments that:
a. are paid-in;
b. have a minimum maturity of at least five years;
c. are callable/redeemable at the initiative of the issuer only after a minimum of five years;
d. are subordinated to depositors and general creditors of the bank; and,
e. may be converted to common shares or written off upon the occurrence of a trigger event, which occurs when a bank is considered non-viable as determined by the BSP.
On the other hand, treasury stock, unbooked allowance for probable losses, and total outstanding unsecured credit accommodations, both direct and indirect, to directors, officers, stockholders, and their related interests (DOSRI) granted by the bank proper, among others, are deducted from capital. The Circular also provides that other capital adjustments may be made as may be required by the BSP.
The above revision expands the definition of capital, thereby allowing banks to raise the same and expand their lending and investment activities.
The Circular also amended the rules on credit risk transfer (CRT) arrangements. Under the Circular, a CRT allows a bank to transfer the credit risk associated with its loan or other credit accommodation subject to the following minimum operational requirements:
1. All documentation used for documenting guarantees and credit derivatives must be binding on all parties and legally enforceable in all relevant jurisdictions;
2. Banks must have conducted sufficient legal review to verify such and undertake further review as necessary to ensure continuing enforceability; and,
3. Compliance with the requirements specific to guarantees and credit derivatives as provided under the Circular.
Loans or credit accommodations covered by a CRT arrangement that complies with the above minimum operational requirements will be excluded from the total credit commitment of the bank to a borrower in determining compliance with the SBL, whereas those not covered by an effective CRT arrangement will still form part of the credit commitment of the bank to the borrower in reckoning compliance with the SBL.
The Circular further provides that loans or credit accommodations covered by an effective CRT arrangement in the form of a guarantee or credit derivative will form part of the total credit commitment of the bank to the protection provider (i.e., guarantor in case of guarantees and protection seller in case of credit derivatives) in reckoning compliance with the SBL. This does not, however, apply to guarantees in the form of standby letter of credit, demand guarantee, or counter-guarantee between a bank’s head office and its branch/es or between the bank’s branches that are in different jurisdictions.
The Circular provides for a six-month transitory period which makes the above guidelines effective only on July 1, 2023. Thus, between Jan. 1 2023 until June 30, 2023, banks must still follow the SBL framework as of end of December 2022 for purposes of determining compliance with the SBL.
This article is only for general informational and educational purposes and is not offered as, and does not constitute, legal advice or opinion.
Justine A. Navarro is an associate of the Corporate and Special Projects department of the Angara Abello Concepcion Regala & Cruz Law Offices (ACCRALAW).
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