Focus on borrowers’ ability to pay


Borrowers’ cash flows and their ability to pay must be the primary focus of a lender when giving out a loan rather than relying heavily on collateral, according to the amended regulations governing credit-risk taking activities of banks and quasi-banks of the central bank.

The Monetary Board revision of the credit regulation framework is in line with risk-based principles as well as the efforts of the central bank to be in synch with global standards, particularly Basel 3, BSP Governor Amando Tetangco Jr. said in an email to reporters.

“Basel 3 has two main elements: more and better capital as well better risk management,” he stated.

Tetangco said the broad thrust of the credit risk management reforms is to strengthen the internal credit decision-making and administration processes in banks, emphasizing the central role of the Board of Directors and senior management in ensuring prudent lending.

In this regard, the BSP governor said prudent lending should be primarily based on solid analysis of creditworthiness and quality of cash flows.

“The focus is on borrowers’ ability to pay and the approach discourages over-reliance on collateral in decision-making. Banks are also called upon to act proactively in managing their credit portfolio to deal with emerging weaknesses,” Tetangco said.

By discouraging obsession with collateral, the new regulations promote better access to credit by those who are not necessarily collateral heavy but do have the ability to pay from business operations or other regular cash flows, he added.

To remove unnecessary obstacles to lending to micro, small and medium enterprises and start-ups, the requirement of submission of income tax returns and audited financial statements for borrowers with outstanding loans of P3 million and below as well as start-ups within three years of operations is dispensed with, the BSP governor said.

Banks, however, should have alternative and documented information basis for lending, he added.

Meanwhile, Tetangco noted that banks should also have prudent internal policy for lending to related parties and for controlling credit risk concentrations.

“Regular stress testing should be practiced. Banks should have systematic analysis of their loan portfolio and provide for loan loss allowances in a timely and sufficient manner as needed. Banks should also have clear-cut policies for dealing decisively with problem credits,” he stated.

Tetangco added that since the changes are quite comprehensive and fundamental, banks are given a longer transition period of two years to come into full compliance.

“Upon effectivity of the circular, banks have six months to do a gap analysis and formulate an action plan. The effectivity is 15 days from publication of the circular,” he said.


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