Bangko Sentral ng Pilipinas. INQUIRER.net file photo
Local banks will soon be ordered to cap real estate loans at 60 percent of their collateral values, down from the average of 80 percent at present, as banking regulators try to head off the formation of a property bubble in the country.
The move is part of a broad measure of reforms that the Bangko Sentral ng Pilipinas (BSP) is set to roll out in the coming weeks to further buttress the Philippine banking system from the effects of market volatility.
More importantly, the new policy is expected to tighten the flow of as much as P200 billion worth of bank credit to the real estate sector, according to industry sources. On the short-term, the tighter credit policy will also translate to higher interest rates as banks demand higher returns to compensate for their higher risk exposure to real estate loans.
“Banks will still be able to lend above the 60 percent collateral value cap, of course,” said one banker, speaking on condition of anonymity because the policy has yet to be announced by regulators.
“But what BSP is saying is that, if the loan goes bad, the bank’s books are only insulated to the extend of 60 percent of collateral value,” he explained. “If they had lent more than that amount, they would have to set aside [loan loss] provisions immediately to cover that gap.”
That new policy of requiring immediate loan loss provisions—as opposed to today’s more lenient provisioning schedules—will have a direct impact on the capital levels of banks hit with bad real estate loans, the official said.
At present, banks have the flexibility to lend as much as 90 percent of a collateral’s value, depending on the asset class. The new policy, however, will cap loanable values across the board at 60 percent.
BSP will give banks a two-year adjustment period to comply fully with the regulation once the circular is released.
This policy shift—which has already been approved by the Monetary Board, but has yet to be formalized by BSP Governor Amando Tetangco Jr. through a circular—was confirmed over the weekend by a ranking BSP official, who explained that regulators wanted to coax banks away from their traditional collateral-based lending mindset.
“That’s how crises happen,” the official explained. “Banks lend based on the value of their real estate collateral which everybody thinks is worth a certain amount today, but is suddenly worthless the following day.”
Instead, the central bank will implement a system where lenders will have to scrutinize more closely the ability of borrowers—whether large corporations, small or medium enterprises, or individual borrowers—to pay off the loan based on the sustainability of their incomes.
“We want banks to focus more on the cash flow of the borrower, and not just the collateral,” the official said. “You can still have collateral as a lending consideration, but only as a backup.”
At the end of June 2014, the local banking system held almost P1 trillion worth of loans to the real estate sector, comprising 18.3 percent of the financial system’s total loan portfolio, according to BSP data.
Of this amount, P27.2 billion or 2.95 percent, were classified as past due, while P24.4 billion or 2.64 percent were booked as nonperforming loans—both still low, relative to the levels seen during real estate bubble-induced financial crises.
BSP officials have repeatedly—albeit gently—cautioned lenders about the ill effects of speculative lending to the high-end property sector, as it tries not to stunt the property sector’s growth by causing undue alarm among buyers.