The Bangko Sentral ng Pilipinas (BSP) issued the directive after concluding a "quiet inquiry" into the exposure of the banking sector in Benpres which had defaulted twice on interest payments to the holders of some P2 billion worth of long term commercial papers.
An official of the BSP told reporters that the directive is "procedural" although he admitted that the central bank is invoking the prudential move to prevent the situation from getting worse in an industry already bleeding from high levels of non-performing loans.
The official said the BSP wants to make sure that banks have enough cushion in case Benpres fails to service any of the secured and unsecured loans that it got from banks during its heyday as one of the country’s biggest industrial conglomerates.
According to the official, banks are required to set aside a 25 percent valuation reserve for clean loans extended to Benpres and appropriate a 10- percent loan loss provision for secured loans.
"What we’re doing is to instruct our examiners to ask banks to provide valuation reserves for unsecured loans and loan loss provisions for secured loans," the official said. "We are trying to reduce any systemic risk that might further deteriorate the health of the banking sector."
The official explained that the move is a critical one since bulk of Benpres’ P30 billion outstanding liabilities represents contingent liabilities that might soon graduate to actual liabilities.
Much of Benpres’ obligations stemmed from guarantees that it provided to its subsidiaries, namely: Maynilad Water Services Inc, Manila North Tollway Corp and Bayan Telecommunications Inc.
"These unaccounted contingent liabilities could become direct exposure of Benpres should banks call on these loans," the official explained.
Benpres, however, has been attempting to get its finances in order and hired Credit Suisse First Boston as financial advisor to help get its balance sheets back in order.
The holding company is also trying to convince its creditors to restructure some of its loans, even considering the possibility of selling some of its subsidiaries to raise cash.
The BSP official said Benpres’ progress is being watched closely to determine the central bank’s next action depending on whether the company’s efforts would be successful or not.
The official said that if Benpres continues to default for one year, the loan loss provision and valuation reserve requirements would be raised to 50 percent for both secured and unsecured loans.
The BSP has been keeping a tight rein of the banking sector as it struggles with NPL ratios of up to 18 percent due to the general weakness of the corporate sector which itself is struggling with unrealized profit and prospects of continued market slowdown.