By Atty. Jun de Zuñiga
In my previous column (25 January 2018), I covered the DOSRI transactions of banks, the rationale for their regulation, and the supervisory requirements for their grant. The DOSRI rule is one of the twin regulations meant to guide banks in the prudential allocation of their credit resources and to deter self-dealing transactions, insider loans and the undue concentration of loans to few and selected borrowers.
The other component of such regulations is the so-called “single borrower’s limit” (SBL) which is commonly referred to as the “SBL.” Credit risk or the risk of loss due to the failure of a borrower to perform its contractual obligations is one of the key risks that banks must adequately manage. There is a need to set prudential limits to restrict bank exposures to single borrowers as such exposures represent credit risk concentration. Imposing loan limits is a measure to deter banks from concentrating their resources to one borrower (Banking Laws of the Philippines, Vol. II, BSP, p. 213).
The SBL is governed by Section 35 of the General Banking Law and by several BSP implementing circulars. Below are highlights of the SBL provisions.
First, SBL covers loans,credit accommodations and guarantees. It has a broad coverage which the Monetary Board may redefine from time to time. Bank guarantees are included in the computation of the SBL since, when called and drawn upon, would lead to actual loan exposures of the bank.
Second, the basis for determining compliance with the SBL is the total credit commitment of the bank to the borrower, whether availed of fully or only partially, and not only the actual outstanding loan and credit accommodation of the borrower (Record of the Senate on S.B. 1519, Nov. 15, 1999).
Third, the current SBL is 25% of the net worth of a bank. The SBL may be increased by an additional 10% provided that the additional liabilities are adequately secured by trust receipts, shipping documents, warehouse receipts and similar documents.
Fourth, loans extended by banks for projects under the Public-Private Partnership (PPP) Program of the government may have a separate SBL of 25%.
Fifth, loans extended by banks to oil companies which are engaged in energy and power generation may also have an additional 15% SBL.
Sixth, there are certain types of loans which can be excluded from the computation of the SBL. These would include: (a) loans secured by obligations of the Bangko Sentral or the Government and those fully guaranteed by the Government; (b) loans to the extent covered by deposit hold-outs; (c) loans under letters of credit to the extent covered by margin deposits; and (d) other non-risk items as determined by the Monetary Board.
Examples of other types of loans which were excluded by Monetary Board from the computation of the SBL are: (a) loans covered by legally effective credit risk transfer arrangements; (b) certain interbank loan transactions; (c) short-term exposures of banks to settlement banks; and (d) loans covered by guarantees of international/regional institutions/multilateral financial institutions.
Seventh, in determining, whether there is a violation of the SBL, the reckoning point is the time when the loan is granted. Any subsequent event or cause that is beyond the control of the bank, or involuntary on its part, will not give rise to the imposition of sanctions, as where a loan, after the grant, exceeds the prescribed limit due to substantial prepayment by another borrowed thereby lowering the ceiling (Banking Laws of the Philippines, ibid., p. 222).
The above comments are the personal views of the writer. His email address is firstname.lastname@example.org