MANILA, Philippines—The Bangko Sentral ng Pilipinas has directed banks to be prudent in lending to local government units (LGUs).
In a circular, BSP Deputy Governor Nestor Espenilla Jr. reminded them that under the Local Government Code, LGUs can only allocate 20 percent of their annual regular income for debt payments.
Thus, Espenilla said banks should require LGUs to submit a certificate stating their borrowing capacity before they can extend loans.
“All banks are directed to adopt and adhere to the policy limits in granting loans and credit accommodations to LGUs,” Espenilla said in the circular.
Most LGUs primarily depend on the internal revenue allotments (IRA) from the government. But there are LGUs that seek additional funds, such as bank loans, to fund more projects and social services.
The circular was issued in line with the BSP’s thrust to help banks keep bad debts to a minimum as they increase lending to help accelerate growth of the economy.
Regulators said banks have room to lend more given their enormous liquidity, but added that prudent lending standards must be observed at all times.