January 20, 2009

BSP tightens regulations to prevent more bank failures

The Bangko Sentral Ng Pilipinas will release new regulations aimed to penalize and restrain “aggressive banking" tactics.

Besides setting clear definitions of “aggressive banking," the Bangko Sentral ng Pilipinas (BSP) will issue a circular that will impose harsher penalties on banks who plan to cheat their depositors.

“The new guidelines clearly define instances or acts of unsafe and unsound banking practices so that there can be no doubt the regulations have been violated and the banker punished," BSP deputy governor Nestor A. Espenilla said.

The new set of rules define “aggressive banking" as giving loans to borrowers that have poor credit histories by extending their interest rates without much protection for such risks.

Operational standards – as set under the new rules – will make “aggressive banking" extremely difficult since off-market interest rates are going to be defined as more than 50 percent of the median market rate.

“The guidelines in past circulars were implicit. In the new guidelines the rules are now clearly spelled out," Espenilla said.

Aiming to prevent a repeat of recent rural bank failures that have disenfranchised thousands of depositors, new central bank rules have disallowed banks from offering deposit and loan rates that are too high and accepting risky borrowers.

The Monetary Board last week approved Circular 640, which amends a directive issued in 2002. The latter, Circular 341, contains the implementing guidelines of Section 56 — “Conducting Business in an Unsafe or Unsound Manner" — of Republic Act 8791 or the General Banking Law of 2000. Its annex, which Circular 640 amended, lists the activities considered as unsafe and unsound banking practices.

The old annex listed “excessive reliance on large, high-interest or volatile deposits/borrowings" as one of these practices. The amendment restates this to “excessive reliance on large, high-cost or volatile deposits/borrowings to fund aggressive growth that may be unsustainable."

The Monetary Board defines “high-cost" as an effective interest rate on deposits or borrowings that is 50 percent higher than the prevailing market median for similar banks.

Aside from high interest rates, the Bangko Sentral ng Pilipinas (BSP) will examine how deposits were obtained, in particular if a bank resorted to offering noncash incentives worth more than the deposits or if the bank accepted the money outside its premises without central bank authorization.

Last year,PDIC seized 13 rural banks belonging to or affiliated with the Legacy conglomerate on account of unsafe and unsound banking practices, insufficient assets to cover liabilities, and poor liquidity. The Legacy banks had been known to lure depositors with a 20 percent interest.

Recently, heavy withdrawals by panicky depositors brought down two Pampanga-based rural banks this month. All 15 banks have since been placed under the receivership of the Philippine Deposit Insurance Corp. (PDIC).

Rural Bankers Association of the Philippines (RBAP) President Tomas S. Gomez IV said the organization “fully supports" the latest BSP circular.

“It further strengthens depositor protection and is consistent with the BSP’s mandate of prudential regulation. Coupled with PDIC charter amendments ... the revised circular will further strengthen the Philippine banking system," he said.

Circular 640 also expands the list of circumstances that comprise “hazardous lending and lax collection."

One is a high incidence of spurious loans because of poor risk management systems. Another is a high number of borrowers with poor credit histories or a high number of loans that are either unsecured or backed with minimum collateral values. A third is high loan rates designed to compensate for the risks attendant to these type of borrowers and loans. “High" is defined as effective interest rates that are 50% higher than the prevailing market median.

Also, “operating in a way that produces a deficit in net operating income without adequate measures to ensure a surplus in net operating income in the future" constitutes an unsafe and unsound banking practice.

Circular 341 allows the Monetary Board to issue cease and desist orders to banks and to impose a fine of not more than P30,000 per day per transaction, among other sanctions.

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