BSP wants tighter watch on heavy corporate borrowers

Banks will soon be rated by regulators based on the quality of their loan portfolios, with the highest marks being given to those financial institutions that lend mostly to corporate borrowers with the best earning capacity.

At the same time, the head of the Bangko Sentral ng Pilipinas (BSP) also wants to have firmer control over the amount of loans made by the financial system to various companies that belong to the same business group.

Speaking to a group of bankers late last week, BSP Governor Nestor Espenilla Jr. said the new policies were part of a set of measures that regulators might soon implement as part of a banking reform package to mitigate systemic risk.

“Mindful of the potential buildup of systemic vulnerabilities, we have also deployed and continue to develop various macroprudential measures,” he told the annual general meeting of the Money Market Association of the Philippines in Makati City.

“Currently, we have exposure drafts on the countercyclical capital buffer, the debt-to-earnings borrowers test (DEBT) that is akin to the existing real estate stress test (REST), and the borrowers interconnectedness index,” Espenilla explained.

A countercyclical capital buffer is a scheme where bank owners are required to put up a greater amount of equity during good economic times in anticipation of unforeseen economic downturns. The banks then will be given the leeway to lend out more of this capital during times of economic difficulty to help the institution and the broader economy grow.

Of particular recurring interest to Espenilla, however, is an early warning system for detecting and controlling the amount of debt carried by large conglomerates—a policy that he has consistently pushed for since his term as central bank deputy chief in charge of bank supervision.

A debt-to-earnings borrowers test, as defined by the BSP chief, will motivate banks to lend only to the most credit-worthy borrowers due to the imposition of corresponding rating rewards or penalties on them for the quality of their loans. In particular, financial institutions will be assessed based on the correlation between their borrowers’ loan sizes and earning capacities.