BSP Deputy Governor Alberto Reyes told reporters that the Monetary Board is preparing a set of guidelines on DOSRI loans, effectively expanding the existing restrictions under the implementing rules of the General Banking Law.
According to Reyes, firms or individuals classified as "related interests" would be allowed to borrow, but only up to 100 percent of their total deposits plus 100 percent of their shareholdings in the lending bank.
However, Reyes said the Monetary Board was conducting a thorough study of the policy because of its extensive impact on the banking industry which he said might ultimately force some banks to adjust their operations.
"Many companies will be affected by this so we are evaluating it carefully," Reyes said.
He said existing rules only prohibit direct borrowing against deposit by directors, officers and shareholders. The new rule, he said, effectively extends this prohibition to related interests.
The immediate impact, according to Reyes, would be on banks which are part of large conglomerates that also lend to affiliates of the group.
Most the country’s large banks belong to conglomerates that control various companies and lending within these groups is not uncommon.
According to the BSP, however, a policy adjustment is necessary to address loopholes that allow banks to abuse DOSRI loans that have been tagged as the main cause of bank failures.
The BSP said it wants to avoid bank failures caused by defaulting DOSRI loans, an event that invariably triggered bank runs.
"This policy will reduce the risk in the financial system brought about by DOSRI loans," Reyes pointed out, adding that companies affected by the new restrictions should either divest their holdings in the bank or else find another bank to borrow from.
Reyes said the new rule is in compliance with the unimplemented provisions of the General Banking Law, prohibiting DOSRI parties from borrowing funds from the bank or extending guarantees without securing prior approval from the Monetary Board.
According to Reyes, this policy would give the Monetary Board the authority to regulate the amount of allowable DOSRI loans as well as investments made by the bank in businesses classified as DOSRI parties.
Under the law, DOSRI loans have to be secured by non-risk assets such as cash deposits and government bonds.
The law also allows the removal or suspension of any bank director or officer found in violation of DOSRI provisions.