BSP eases rules on real estate loans of banks

The Bangko Sentral ng Pilipinas (BSP) has eased the restrictions on banks’ exposure in the property sector and excluded private housing and public infrastructure construction loans from the 20-percent ceiling on real estate loans.

The policy-setting Monetary Board of the BSP has approved the new regulations that will rationalize the limits on real estate loans, which were first instituted in reaction to the 1997 Asian financial crisis.

The BSP said it is imposing a single 20-percent overall limit on the real estate lending of universal and commercial banks primarily as a prudential safequard against over-concentration of credit to commercial lending.

Under the new rules, the BSP said loans for the construction of public infrastructure are now excluded from the definition of real estate loans and consequently from the 20-percent limit.

The BSP first decided to limit the banking sector’s exposure in real estate following the  collapse of the property sector in 1997 that left banks holding large amounts of non-performing assets that the industry is still trying to unload to date.

However, the BSP decided to remove loans related to public infrastructure since projects such as roads, bridges and railways had a different risk configuration relative to commercial property development.

The BSP said that unlike public infrastructure, commercial property development projects are more susceptible to speculative motivations and bank exposure should continue to be limited.

The BSP also decided to exclude housing loans for individual households regardless of the amount, as well as loans extended to real estate developers for the construction of socialized and low-cost residential properties under various government housing programs.

The BSP said it excluded housing projects from its restrictions to prop up the government’s National Shelter Program which was supposed to address the country’s chronic housing shortage.

However, the BSP warned that such loans would remain under the BSP’s tight regulations on strict underwriting standards and the prescribed limits on loan amount that banks are allowed to grant relative to the value of collateral.

But the BSP said real estate loans to the extent guaranteed by the Home Guaranty Corp. or collateralized by non-risk assets would continue to be excluded from the 20-percent limit.

Furthermore, the BSP said the new rules also exempted trust department of banks from complying with the prescribed REL limits, saying that apart from observing the prudent man’s rule, the trustee banks do not really assume credit risk.

“The assets received in trust or in any other fiduciary capacity are administered in accordance with the terms and conditions of the trust or fiduciary agreement,” the BSP explained.

Thrift banks and rural/cooperative banks whose traditional market niches are residential RELs and mortgage financing as well as agricultural and cooperative loans, are not subject to the 20-percent limit.