BSP tightens rules on granting of salary loans

MANILA, Philippines–Regulators are intensifying their watch on salary loans granted to individuals as part of efforts to maintain the strength and stability of the domestic financial system.

A new regulatory framework on salary loans is also being drawn up, the Bangko Sentral ng Pilipinas (BSP) said, amid the recent rise in loans granted to cash-strapped employees not covered by official statistics.

The announcement of the new rules represents one of the BSP’s first moves to keep watch on “shadow banking” in the country.

Shadow banking refers to any type of unregulated lending to businesses or consumers.

The BSP said in a statement that it was reacting to the growing trend in salary loans in terms of volume and number of accounts.

The policymaking Monetary Board approved new rules specifically defining salary loans and enhancing the reporting templates used by banks and non-stock savings and loan associations to accurately measure the volume, the BSP said.

Salary loans are defined as “unsecured loans, granted to individuals on the basis of regular salary, pension or other fixed compensation, where repayment would come from such future remunerations, either through salary deduction, debit from the borrower’s deposit account, over-the-counter payment or other type of payment arrangement agreed upon by the borrower and lender.”

Under the new rules, salary loans would now be separately reported by banks and other supervised institutions such as lending companies under the Loans to Individuals for Consumption Purposes (LICP) sub-category.

Previously, only credit card and auto loans have separate line items under LICP. These new rules take effect this month.

“The BSP is likewise readying an appropriate regulatory and policy framework on salary loans to ensure that the exposures of BSP supervised institutions are well-managed and that the credit underwriting practices subscribe to safety and soundness principles,” BSP said.

Embedded in the framework are consumer protection issues such as potential over-indebtedness.

The framework, which is still a work in progress, will take into account the actual practices, macro-economic environment, and interplay among lending institutions, government agencies, private entities and borrowers.