BSP sets more stringent rules on bank lending

Banks may soon be under more pressure to rein in lending to property firms following the approval of new stringent guidelines on real estate loans.

The Bangko Sentral ng Pilipinas (BSP) on Thursday published details of stress tests targeted at the real estate exposures of lenders.

According to the new rules, banks must at all times have enough capital to meet regulatory requirements, even if a significant portion of their real estate loans are assumed to be written off.

Bankers Association of the Philippines (BAP) president Lorenzo Tan welcomed the new rules, saying these would force weaker banks to think twice about their exposure to the property sector, which not only covers loans but also investments in property firms.

“It will result in reallocation of portfolio risks and force weaker banks to be more diligent in lending,” said Tan, who heads Rizal Commercial Banking Corp.

He told the Inquirer that the excess supply of cheap cash in the economy partly contributed to the growth in lending to real estate firms.

“It’s good to temper supply of funds to specific property types,” Tan said. “It’s a good time for the BSP to start imposing macroprudential measures to avoid a property bubble.”

Last year, in explaining the increased regulatory supervision on real estate loans, BSP Governor Amando M. Tetangco Jr. said history was “replete with cases where bubbles caused massive dislocations and instigated further damage” to the rest of the economy.

Under the new rules, the BSP has set new Real Estate Stress Test (REST) limits for local banks. It says that, even if 25 percent of a bank’s real estate exposure has been written off, the bank must still be able to maintain a common equity tier 1 capital ratio of at least 6 percent. Its total capital adequacy ratio (CAR) must also stay above the required minimum of 10 percent.

A bank’s capital serves as buffer that absorbs losses from risk-weighted assets that are written off. CAR refers to the level of a bank’s capital relative to its assets.

This is made up of two types of capital: tier 1, which mainly refers to common equity of shareholders; and tier 2, which are debt securities that absorb part of the losses in case a bank is ordered shut and liquidated.

Banks that fail to meet the REST limits will be given several chances to explain and correct their deficiencies.

A bank that “persistently” fails to comply with the REST limits, or deviates from the commitments in its own action plan, “may be considered to be engaging in unsafe and unsound practice,” the BSP said.

The central bank may impose stiff financial or regulatory sanctions on these banks.

Latest data from the central bank showed that, at the end of 2013, universal, commercial and thrift banks’ exposure to real estate stood at the equivalent of 21.8 percent of their total loans, similar to the level recorded a quarter earlier.

Non-performing real estate loans declined to 2.8 percent of total real estate loans at end-2013, from the end-September level of 3.2 percent.