BSP goes basic on monitoring banks’ property exposure

MANILA, Philippines - The Bangko Sentral ng Pilipinas (BSP) has gone down to the “most basic level” on monitoring banks’ property exposure, readying regulations that will cover contract-to-sell issuances of financing agents.

“I am happy to update you that the reference practices on contract to sell financing that the banking industry jointly developed with BSP was formally recognized by the Monetary Board at its meeting last week,” BSP Deputy Governor Nestor Espenilla Jr. said in a speech last Friday.

Official regulations will be issued this week, he added.

A contract to sell is an agreement between two parties agreeing to buy and sell a particular property in the future. In real estate, it is usually an understanding between the bank, as a financer, and the person who applied for a bank loan to purchase a property.

“We want to cover everything down to the most basic level, which is this. It is like upon availing of the loan, you are already avoiding any risky practices,” Espenilla told reporters on the sidelines of the Chamber of Thrift Banks general membership meeting in Makati.

Formal contract to sell regulations, he said, will include standards on developer accreditation, equity requirements, gauging borrower’s paying capabilities and some “documentation standards.”

Espenilla said the central bank wants to ensure financial stability is sustained by “exploring other facets of banking that may have the potential to cause broad dislocation.”

For the past month, BSP has repeatedly stressed, both in public gatherings and official comments, that it remains watchful of developments in the real estate market and its connection to bank lending activities.

What it wanted to prevent is the formation of asset bubbles, a situation when asset prices overshoot that they do not reflect market prices. Such is seen to promote loan defaults which can strain banks’ balance sheets. It is also detrimental to the local economy.

Those statements have been succeeded or preceded by announcements on new regulations, including one that expanded real estate exposure computation to include previously exempted sectors such as low-cost housing and funds invested in bonds and stocks.

“Alongside that, we are looking to relate real estate exposures to banks’ capital base rather than just as a portion of the loan book,” Espenilla said.

“This can then be the basis for revisiting existing prudential limits as may be necessary,” he added. Under present rules, banks should only have up to 20-percent property exposure.

Despite recent BSP moves, Victor Asuncion, executive director for global research and consultancy at CB Richard Ellis Philippines, said there are still no signs of asset bubble forming.

“We are encouraging people to borrow money and obviously it has to be done properly. BSP wants to make sure it does not go haywire,” Asuncion said in a phone interview.