The Monetary Board (MB) announced over the weekend that under the revised rules of the BSP, ceilings would be applied on loans and other credit accommodations and guarantees granted to bank subsidiary or affiliate.
According to the BSP, these accommodations would be limited to 10 percent of the net worth of the lending bank or quasi-bank with a sub-limit of five percent of its net worth if the loan is unsecured.
Moreover, the BSP also put an aggregate limit on the total loans, other credit accommodations and guarantees to all subsidiaries and affiliates of banks.
The BSP said these loans should not exceed 20 percent of the total net worth of the bank or quasi-bank.
"In making the changes, the MB affirmed the basic principle that dealings of banks and quasi-banks with their subsidiaries and affiliates should be strictly limited," said Deputy Governor Nestor Espenilla Jr.
"When undertaken, these should be conducted in the regular course of business and upon terms not less favorable to the bank than those offered to other clients," Espenilla added.
Espenilla said the MB also reiterated that all unsecured loans, other credit accommodations and guarantees to subsidiaries and affiliates of banks would continue to be fully deducted from their capital accounts for purposes of calculating the capital adequacy ratio and net worth of the institution.
The BSP has already started tightening bank loans to related interests in 2004 but it gave banks two years to adjust to the new regulations. This transitory period was extended for another year, allowing banks more time to comply with regulations on loans to related interests and manage their portfolio of unsecured DOSRI loans.
In the 2004 circular, the BSP redefined what could be considered DOSRI transactions and provided for stricter regulations on DOSRI loan transactions.
"For the first time, the definition of ‘related interests’ included subsidiaries and affiliates," Espenilla explained.
However, he said this definition created legal problems and to simplify, the MB decided to carve out and directly specify ceilings on bank credit accommodations to their subsidiaries and affiliates.
In the meantime, Espenilla said the rules maintained the enhanced DOSRI limit rules.
Under the transitory provisions, sanctions for non-compliance are not applied to outstanding loans, other credit accommodations and guarantees previously not considered as DOSRI accounts prior to the issuance of the memorandum.
Banks are also allowed not to deduct unsecured DOSRI loans from their capital accounts for two years. These provisions have now been extended for another year.
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.