BSP tightens rules on unsecured loans

The Bangko Sentral ng Pilipinas (BSP) has tightened its regulations on clear or unsecured bank loans as it introduced the concept of "portfolio-at-risk" or PAR that requires banks to provide allowances for probable losses arising from collateral-free loans.

The BSP approved the new regulation yesterday, introducing the PAR concept first on micro-finance loans and eventually to cover all unsecured bank loans based on PAR.

BSP Deputy Governor Alberto V. Reyes said the PAR concept would be applied first on microfinance-oriented banks and microfinance units of banks that were not microfinance-oriented.

Reyes said the PAR concept is an international standard for measuring delinquent loans. The BSP wants to apply it first on microfinance loans before introducing the concept to other clear or unsecured loans.

"Compared to regular lending, we are applying the PAR concept on clear microfinance loans because these loans tend to be short-term, payments are more frequent, there are no tangible collateral and their delinquency is more volatile," Reyes explained.

These characteristics, Reyes said, created the requirement for more aggressive provisioning to ensure that banks would have adequate allowance for unsecured loans and any event of default would not cripple the institution.

Aside from unsecured microfinance loans, Reyes said the PAR rules would also cover restructured loans in order to prevent banks from window-dressing their loan portfolio.

"If we do not include restructured loans, they might be subject to smoke-and-mirror distortion and it might tempt bank management to give their portfolio an artificial facelift through inappropriate restructuring," he explained.

Under the new rules, Reyes said that based on the PAR standard, the BSP would now consider past due all loans where the borrower has missed at least one installment. "This means that if the borrower misses one payment, the entire loan will be considered past due," he said.

The rules provided that if the loan is one to 30 days PAR, the bank would be required to provide an allowance for probable loss amounting to two percent of the loan amount.

Loans that were 31 to 60 days PAR would be covered by a 20-percent allowance and loans that are 61 to 90 days PAR would be covered with a 50-percent allowance.

Loan accounts that are over 91 days PAR or if the loan has been restructured twice, would be covered by a 100-percent allowance for probable loss.

"Eventually, we will also adopt the PAR concept for other unsecured loans payable in installments, including credit cards and other consumer loans," Reyes said.