BSP gives banks extra year to comply with DOSRI rules

The Bangko Sentral ng Pilipinas (BSP) agreed to give banks another year to comply with regulations on loans to related interests and manage their portfolio of unsecured DOSRI loans.

The BSP said yesterday that the Monetary Board approved the one-year extension of the two-year transitory provisions of a memorandum circular issued in March 2004.

According to the BSP, the extension was approved to provide banks with more time within which to manage their unsecured DOSRI (directors, officers, stockholders and related interests) loans, other credit accomondations and guarantees.

In the 2004 circular, the BSP redefined what could be considered DOSRI transactions and provided for stricter regulations on DOSRI loan transactions.

Under the transitory provisions, however, sanctions for non-compliance were not applied to outstanding loans, other credit accommodations and guarantees previously not considered as DOSRI accounts prior to the issuance of the memorandum.

Banks were also allowed to not deduct unsecured DOSRI loans from their capital accounts for two years. These provisions have now been extended for another year.

The BSP’s 2004 issuance expanded the definition of related interests which now cover corporations, associations or firms that owns or controls at least 20 percent of the subscribed capital of a substantial stockholder of the lending bank.

Also included in the definition were 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 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 considered unsafe and unsound banking practice.

According to the BSP, the expanded definition of lending to related interests was now covered by individual and aggregate ceilings on DOSRI loans.

The total outstanding loans, the BSP said, 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.

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 was lower.

However, the BSP said this would be allowed only if the total unsecured loans to the 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 be subjected to the penal provisions of the GBL.

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.