The Bangko Sentral ng Pilipinas this month unveiled a new rule to dampen the banks’ appetite for the lucrative real estate business. This, according to many, is just what the banking industry needs.
Moody’s Investor Service in a new report this week cheered as “credit positive” the BSP regulation that would strengthen credit risk management and tighten bank lending standards.
“The new regulation is credit positive for Philippine banks because it will require them to cap the value of real estate collateral and will accelerate loan-loss provisioning for distressed loans,” the debt watcher said in a report.
The regulation would also reduce the banks’ credit risk concentration among borrowers in interconnected industries.
This follows the real estate stress test (REST) limits on banks that the BSP introduced in July. REST limits linked the size of banks’ exposure to real estate to the amount of capital they have set aside for possible losses.
The limit, in combination with the stress test, will protect asset-quality amid property price volatility.
Moody’s said most Philippine banks are already exposed to real estate through their large conglomerate owners and loans to their affiliates, which are also leading players in the real estate market.
The new regulations are expected to limit banks’ exposure to real estate and related sectors.
The new regulations have two key elements: a cap on the value of real estate collateral at 60 percent of appraisal value and an expanded definition of large exposures. Banks must migrate to these new regulations within the next two years.
For the purpose of treating a loan as secured, banks will have to cap the value of real estate collateral at 60 percent of its appraisal value.
Although banks will still be allowed to lend above the 60 percent cap, the remaining portion will be treated as an unsecured loan, and will require banks to set up higher provisioning for potential loan losses if the account were to become distressed.