BSP enhances regulations related to Single Borrower’s Limit

The Monetary Board approved the amendments to the regulations on Single Borrower’s Limit (SBL), particularly the credit risk transfer (CRT) arrangements, as well as the expansion of the definition of capital, which is used for determining compliance with varied prudential limits, including the SBL.

The policy aligns the BSP regulations with internationally recognized standards on CRT and globally accepted rules on trade and finance transactions. Bangko Sentral Governor Felipe M. Medalla said, “The policy enhancements aim to make the BSP rules more responsive to evolving business and credit risk management practices.

This is a timely measure since it provides banks with flexibility in utilizing effective credit risk mitigation techniques which would allow them to prudently expand credit exposures in line with growth of the economy.”

In particular, the amended SBL regulations provide minimum operational requirements for a CRT arrangement to be considered as effective.  These are patterned after the credit risk mitigation requirements of the Basel III capital standards which ensure that a particular CRT arrangement is binding on all parties, legally enforceable in all relevant jurisdictions, as well as direct, explicit, irrevocable, and unconditional, among others.

The revised SBL rules, likewise, recognize guarantees between a bank’s head office and its branch/es or between a bank’s branches located in different jurisdictions as an effective CRT, subject to certain conditions.

The documentation of such intrabank guarantee must be issued in accordance with internationally recognized rules on finance transactions where the bank’s head office and branch are treated as separate entities with respect to the payment of such obligation. Moreover, the total amount of the intrabank guarantees must not exceed 100.0 percent of the total loan portfolio of the Philippine bank concerned as of the end of the preceding month.

Given these controls, the BSP will dispense with the prior BSP approval requirement on every credit transaction covered by a CRT arrangement for these to be excluded from exposures that are subject to SBL.

“The removal of the prior BSP requirement upholds BSP’s expectations for banks to exercise sound risk governance and be primarily responsible for managing credit risk on their exposures. It also streamlines the lending process of banks allowing them to readily support the financing requirements of the country,” Bangko Sentral Governor Medalla added.

The foregoing new regulations will take effect on 01 July 2023 to provide banks with reasonable time to make the necessary adjustments to their policies and procedures to ensure a smooth transition to the operational requirements for employing CRT arrangements.

In view of the changes in the CRT regulations, banks shall continue to use the existing SBL framework as of end-December 2022 during the transition period from 1 January 2023 to 30 June 2023 to minimize disruption in the lending operations of banks.

The said SBL framework also includes the use of 30 percent SBL by all banks, and the grant of exposures by covered foreign bank branches at amounts which shall not exceed the 30 percent SBL using as reference point 2x the level of their prescribed regulatory capital.

Meanwhile, the new regulations revise the definition of regulatory capital, which is used as base in computing the SBL, among other prudential limits. This shall now include other instruments, which may be likened to preferred stocks, subject to certain criteria such as but not limited to minimum maturity of (5) years. This provides a bank with more options as regards the types of instruments that it can use to boost capital to back up growth in its lending and investment activities.

The enhancement of the SBL regulations is part of the initiatives of the Bangko Sentral to promote banking system stability through the adoption of sound credit risk management and regulatory capital standards.