BSP nixes banks’ proposal for unregistered loans as hedging tool

The Bangko Sentral ng Pilipinas (BSP) has taken steps to smoke out unregistered loans, asking banks to submit a complete inventory after it rejected their request to allow the hedging of such loans when longer-term dollar forward contracts are finally restored.

The BSP has been in discussion with the banking industry for the extension of dollar forward contracts beyond the six-month limit but sources privy to the negotiations revealed that banks also wanted to be able to hedge unregistered loans.

The inclusion of unregistered loans as a hedging tool was part of the proposals submitted by the Bankers Association of the Philippines (BAP). One top-level source said the Monetary Board, the policy-making body of the BSP, rejected this proposal.

According to the source, unregistered loans are funded outside the banking system and allowing banks to hedge them would be tantamount to allowing them to fund the loans from within the banking system.

Since it deregulated the foreign currency market, the BSP no longer monitors unregistered loans since they do not pass through the formal banking system. However, since banks want to be able to hedge unregistered loans, the BSP said it wanted to find out the extent of these loans.

"If we allow banks to hedge unregistered loans, we are in effect allowing them to source these funds from the banking system," the official explained. ‘We can not do this but we can try and find out what could be done instead."

The source said the BSP asked the BAP to submit the inventory of unregistered loans to give the central bank an appreciation of the potential impact should it eventually allow the selective hedging of unregistered loans.

"They will submit to us an inventory of all these unregistered loans and we’ll find a way to help," said the source. "The BSP realizes that these companies were affected by the restrictions on forex corporations so we know where they are coming from."

The BSP was not entirely opposed to the idea of allowing banks to hedge unregistered loans but if ever, it would be on a strict case-to-case basis, the official said.