"We hope these regulations would curb excessive DOSRI lending which has been a major cause of bank failure," said BSP Governor Rafael Buenaventura.
"In addition, borrowers will be subject to better credit discipline which they might have avoided in the past by borrowing from related banks," he added.
According to the BSP, the definition of related interests would now cover corporations, associations or firms that own or control at least 20 percent of the subscribed capital of a substantial stockholder of the lending bank.
Also included in the definition are corporations, associations or firms in which the lending bank owned at least 20 percent of the subscribed capital. If the entity has an existing management contract or any similar arrangement with the lending bank, they would also be considered "related interests".
The new BSP rule effectively put further restrictions on loans to any related interests that could create conflicts of interest in the bank and spawn what the BSP considers as unsafe and unsound banking practice.
The BSP said the expanded definition of lending to related interests is now covered by individual and aggregate ceilings on DOSRI loans.
The total outstanding loans as well as other credit accommodations and guarantees to each of the bank’s DOSRI would be limited to an amount equivalent to their respective unencumbered deposits and book value of their paid-in capital contribution in the bank, the BSP said.
Under the rules, the BSP also restricted unsecured loans to DOSRI accounts to a maximum of 30 percent of their respective total loans, other credit accommodations and guarantees.
On the other hand, the BSP said that total outstanding loans, other credit accommodations and guarantees to DOSRI accounts should not exceed 15 percent of the bank’s total loan portfolio or 100 percent of net worth, whichever is lower.
However, the BSP said this would be allowed only if the total unsecured loans to said DOSRI would not exceed 30 percent of the aggregate ceiling or the outstanding loans, credit accommodations and guarantees.
The BSP said it would apply sanctions in case of violations. The bank could be prohibited from declaring dividends for non-compliance or the bank officer or director could be removed from office and subjected to penal provisions of the General Banking Act.
However, the BSP said that in order to soften the impact of the new regulations, loans that were not previously considered DOSRI would be covered by transitory provisions.
But the BSP said it is requiring banks to fully disclose DOSRI loans in their annual report, financial statements and other reports submitted to the BSP.