BSP eases capital cover for agricultural loans

MANILA, Philippines - The Bangko Sentral ng Pilipinas (BSP) has lowered the risk weight of agricultural loans covered by the government’s Agriculture Guarantee Fund Pool (AGFP).

BSP Governor Amando Tetangco Jr. has issued Circular 750 allowing banks to allocate significantly less amount of capital cover for agricultural loans as long as these are backed by the AGFP to help make lending to borrowers from the agriculture sector more attractive to banks.

The circular stated that loans guaranteed by AGFP would carry a risk weight of only 20 percent compared to 100 percent assigned to other types of loans.

The risk weight determines the amount of capital cover a bank must allocate to meet the capital adequacy ratio (CAR) requirement imposed by the BSP.  

The bank regulator pointed out that the amount of capital cover for loans backed by AGFP could be lowered because the pool of fund is dependable enough to serve its guarantee purpose in case of default.  

The AGFP was created under Administrative Order 225-A and refers to the pool of money contributed by government-owned firms to support the goal of enhancing food productivity in the country. It is used for programs that benefit the agriculture sector, such as the provision of guarantee to bank loans applied for by members of the agriculture sector.

Tetangco said in the circular that the portion of AGFP that is used to guarantee bank loans should be invested only in assets composed mainly of government securities that are virtually risk free.

He added that portion of AGFP used to guarantee bank loans is allowed to back credit as much as three times its size.

The BSP said the circular covers big and small banks alike.

The issuance of the circular is seen as another support to the agriculture sector, which has recently benefited from a legislative move that tightened the provision of the Agri-Agra law.

The BSP is closely monitoring the compliance of banks operating in the Philippines on the 25 percent mandatory credit allocation to the agricultural sector through agrarian reform and agri-agra activities.

BSP said in a statement that Philippine banks now operate under the provisions of Republic Act 10000 also known as “The Agri-Agra Reform Credit Act of 2009” that superseded Presidential Decree 717.

Last September, the BSP issued Circular No. 736 containing the revised rules and regulations requiring banks to set aside at least 25 percent of their total loanable funds for agriculture and agrarian reform credit in general.

In the circular, the bank regulator limited the modes of alternative compliance to the mandatory credit allocation.

The BSP said banks were required to submit their inaugural report detailing their compliance with the provisions of RA 10000 last January.

The BSP, together with the Department of Agriculture (DA), Department of Agrarian Reform (DAR) has been working closely to coordinate the execution of the new agri-agra law.