Question & AnswerQ&A (BSP CIRCULAR NO. 640, S. OF 2009)
The primary purpose of BSP Circular No. 640, S. of 2009 is to amend Annex A (List of Activities Which May Be Considered Unsafe and Unsound Banking Practices) of BSP Circular No. 341 dated 6 August 2002, updating guidelines on unsafe and unsound banking practices.
No, the activities enumerated are considered only as guidelines and are not irrebuttably presumed to be unsafe or unsound. The Monetary Board may consider other acts or omissions as unsafe or unsound practices as well.
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 is considered an unsafe banking practice.
High-cost deposits/borrowings are those where the effective interest rate paid and/or non-cash incentives are 50% over the prevailing comparable market median rate for similar bank categories, maturities, and currency denomination, and are accompanied by certain circumstances such as undue reliance on brokered deposits, large deposit generation expenses, deferral of expenses, non-cash incentives disproportionate to deposit amounts, and unauthorized solicitation outside bank premises.
Brokered deposits are deposits solicited and accepted through third-party brokers. Excessive reliance on brokered deposits is a factor indicating aggressive and possibly unsustainable growth funded through high-cost and volatile deposits, which is considered an unsafe banking practice.
These include a high incidence of spurious and fraudulent loans due to inadequate risk management, reliance on borrowers with impaired or limited credit history without robust risk systems, excessively high loan rates exceeding market rates by 50%, and assignment of loans without recourse resulting in real estate investments exceeding prescribed ceilings.
Hazardous lending and lax collection policies include practices such as issuing fraudulent loans, lending to borrowers with poor credit history without proper risk management, charging excessively high interest rates to compensate for risks, and improper loan assignments exceeding real estate investment limits.
Failure to heed such warnings is listed as an unsafe and unsound banking practice, implying potential regulatory consequences which may include sanctions, penalties, or corrective actions from the Monetary Board and BSP.
Any action likely to cause insolvency or substantial dissipation of assets or earnings, or that would seriously weaken the condition of the institution or prejudice the interests of its depositors, investors, or clients, is considered an unsafe and unsound banking practice.
The Circular took effect immediately upon its adoption on January 16, 2009.