With financial leasing beginning to make headway in the Philippines, it would be gainful to look at major regulations affecting the industry.
Financial leasing companies are overseen by the Securities and Exchange Commission (SEC) and, if a subsidiary of a bank or granted a quasi-banking license, by the Bangko Sentral ng Pilipinas (BSP).
The main legislation covering financial leasing companies is Republic Act (RA) 8556, or the Financing Company Act of 1998. Financial leasing companies like BDO Leasing and Finance Inc. and BPI Leasing Corp. are essentially “financing companies” that are “primarily organized for the purpose of extending credit facilities to consumers and to industrial, commercial, or agricultural enterprises, by direct lending or by discounting or factoring commercial papers or accounts receivable, or by buying and selling contracts, leases, chattel mortgages, or other evidences of indebtedness, or by financial leasing of movable as well as immovable property.”
“Financial leasing,” meanwhile, is defined as a mode of extending credit through a non-cancelable lease contract under which the lessor purchases or acquires, at the instance of the lessee, machinery, equipment, motor vehicles, appliances, business and office machines, and other movable or immovable property in consideration of the periodic payment by the lessee…”
By law, these periodic payments must be enough to amortize at least 70 percent of the purchase price or acquisition cost, plus incidental expenses and profit over a period of not less than two years.
During this period, the lessee has the right to hold and use the leased property, as well as the right to expense the lease rentals paid to the lessor. The lessor however bears the cost of repairs, maintenance, insurance and preservation.
Roberto Lapid, vice chairman and president of BDO Leasing, told The Manila Times that in the Philippines, financial leasing is in the purview of financing companies as defined by RA 8556, and banks are not allowed to directly engage in such activity. A subsidiary can do financial leasing, but must secure a license from the SEC.
Central bank circulars
Two major circulars issued by the BSP also affect the operations of financial leasing companies, according to Lapid.
BSP Circular 855, issued in 2014, pertains to credit risk management. “It’s more of coming up with an efficient but new practice of governance. Its basic features involve coming up with an evaluation of the credit risk management system of the company, then it determines the role of the board,” he explains.
These regulations cover the front, middle and back offices. The front office, which includes account officers, solicits clients and negotiates terms. The back office handles documentation, administration and control.
In the middle is the risk-rated classification for different types of borrowers, e.g. “Double-A” or “Triple-B.”
“Side by side, you have to have credit policies, procedures, and guidelines,” Lapid notes.
Lastly, the circular regulates the credit approval process. In the case of BDO Leasing, the credit and writing process is centralized within BDO Unibank. “Stringent measures are applied to all lease or loan applications by the different levels,” Lapid says.
BSP Circular 941, issued in January 2017, revised the definition of past-due and non-performing loans.
Before, loans in arrears were classified into three: delinquent, past due, and non-performing, with delinquency deemed as the least problematic.
“They became more exact in the definition, so if you are not able to pay within 30 days, you’re considered past due, no longer delinquent. Now we only have past due, and non-performing. But there is a curing period of 30 days before you are deemed past due,” Lapid explains. “You’ll be classified as nonperforming if you’re not be able to pay the amortizations in 91 or more days, including interest.”
Credit info, data privacy
Financial leasing companies are also now required to comply with two new laws – the Credit Information System Act or CISA (RA 9510) and the Data Privacy Act (RA 10173).
Leasing companies are expected to share information with the new Credit Information Corp. this year after determining what types of information are to be shared with the firm, which is 60-40 venture between the government and the private sector.
Under the Data Privacy Act, companies must name a data privacy officer who will protect personal information obtained from clients.
“Of course, you can only share and you can only divulge if you have authorization. Otherwise, you cannot do cross selling—in which companies draw from a database and does a sales pitch to everyone,” Lapid explains.
In 2014, the Bureau of Internal Revenue (BIR) issued new regulations that construed financial leases as similar to loans, thus subjecting financial leasing to the documentary stamps tax. Costs to the clients went up slightly as a result, notes Lapid.
Overall, Lapid assesses regulations on financial leasing companies in the Philippines as stricter compared with other countries in the region.
“In other countries in the Association of Southeast Asian Nations, it’s more conducive for them to do leasing because they’re not too restricted in terms of tax impositions or rules. Here, we are somewhat limited,” he says.
There has yet to be a clamor from the industry to ease up on regulations.
“The Financing Company Act can be amended or changed… in in 1998, we came out with a revised Financing Company Act. We can win and actually change that, but we must pass a law in Congress again,” he says.