Banks may now convert $ loans to peso loans

The Bangko Sentral ng Pilipinas (BSP) is allowing the conversion of dollar loans into peso loans in an attempt to prevent another wave of dollar loans turning bad at a time when banks could barely handle their increasing bad loans.

Meeting last week, the Monetary Board approved a policy allowing the transfer of dollar loans to the banks’ regular banking unit without prior approval from the BSP provided the loans meet strict requirements.

According to the BSP, it would allow banks to transfer foreign currency deposit unit (FCDU) loans and FCDU real or property owned and acquired (ROPOA) assets to their regular banking if they are registered Banks may loans and the repayment can be sourced from within the banking system.

"This way, the borrower need not hedge anymore since they could pay their dollar loans in peso," said BSP Deputy Governor Alberto V. Reyes. "But the transfer will be done only if the borrower agrees."

The main objective, according to Reyes, is to allow the conversion of dollar-denominated FCDU loans and ROPOA into peso-denominated loans. To do this, he said the loans will have to be transferred from the FCDU unit of the bank to the bank proper since these are two separate banking units.

Reyes said the cut-off date is set at October 2001 which means that loans obtained after the cut-off would have to be paid from sources outside the banking system.

Reyes said the MB decision to ease the process of transferring FCDU loans to the bank proper was prompted by requests from banks themselves. "We were swamped by requests because of the fluctuations in the peso-dollar exchange rates which has created the mismatch," Reyes explained.

Reyes said this will ease the demand for dollars and the pressure on the peso while banks avoid another explosion of non-performing loans (NPLs) in their loan portfolio.

The policy, however, will cover only registered loans that pass through the banking system. Unregistered loans, Reyes said, are still blocked unless they were actually registered.

The BSP has made moves earlier 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 inclusion of unregistered loans as a hedging tool were among the proposals submitted by the Bankers Association of the Philippines (BAP) and one top-level source said the Monetary Board rejected this proposal.

According to a BSP source, unregistered loans are funded outside the banking system and allowing banks to hedge them would 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."

Banks, however, balked at the requirement for them to submit an inventory of unregistered dollar loans. In effect, it also killed the proposal to use them as hedge instruments.