QuestionsQuestions (BSP CIRCULAR NO. 247)
Banks must observe Section 76 of R.A. No. 337 (as amended), which requires proper caution to ascertain that the debtor is capable of fulfilling commitments to the bank before granting a loan.
Loans must be grouped qualitatively into either Unclassified or Classified, in addition to being classified as current or past due.
Unclassified loans have no greater-than-normal risk and lack the characteristics of classified loans. The borrower has apparent ability to satisfy obligations in full, so no loss in ultimate collection is anticipated.
Examples include: (1) loans secured by hold-outs on deposits/deposit substitutes maintained in the lending institution, margin deposits, or government-supported securities; and (2) loans with technical defects/deficiencies in documentation or collateral requirements that are isolated, not material, and do not undermine repayment chance or orderly liquidation.
Deficiencies are first brought to Management for corrective action during the examination; those not corrected are included in the Report of Examination under “Miscellaneous Exceptions,” and deficiencies uncorrected in the following examination shall be classified as “Loans Especially Mentioned.”
When the loan has certain technical or documentation/collateral-related deficiencies that are isolated and not material to the overall credit risk, but still require correction (e.g., unregistered mortgage instrument not compliant with loan approval; improperly executed pledge/mortgage documents; unnotarized mortgage instruments; missing/expired insurance endorsements; loans beyond approving authority limits; loans secured by property with an uncancelled annotation or lien/encumbrance).
They have potential weaknesses that deserve close Management attention. Although they have risks that could affect repayment if left uncorrected, their characteristics indicate potential weaknesses but not yet the higher probability/severity of loss required for Substandard/Doubtful/Loss.
Loans past due for more than thirty (30) days up to ninety (90) days are classified as Loans Especially Mentioned.
Substandard loans appear to involve a substantial and unreasonable degree of risk to the institution due to unfavorable record or unsatisfactory characteristics, with a possibility of future loss unless given closer supervision and with well-defined weaknesses jeopardizing liquidation.
Loans past due for more than ninety (90) days are classified as Substandard (subject to the circular’s other conditions).
Renewed/extended unsecured loans of borrowers with declining operations/illiquidity/increasing leverage trend without at least twenty percent (20%) repayment of principal before renewal/extension, or current loans of borrowers with unfavorable operations for two consecutive years or impaired/negative net worth (with start-up firms evaluated case-by-case).
Doubtful loans have weaknesses similar to Substandard but with added characteristics making collection or liquidation in full highly improbable and substantial loss probable.
Past due clean loans classified as Substandard in the last BSP examination are Doubtful if they have not at least twenty percent (20%) repayment of principal during the succeeding twelve (12) months or have current unfavorable credit information.
Loss loans are considered uncollectible or worthless and not warranted as bankable assets, even if some recovery/salvage value might exist; the circular lists criteria such as past due clean loans with unpaid interest for six (6) months, installments where amortization of interest is past due for six (6) months unless well secured, insolvency/unknown whereabouts, worthless collateral, absolutely uncollectible loans, or Doubtful loans with no payment of interest or substantial reduction of principal during the succeeding twelve (12) months.
The allowance for probable losses for Loans Especially Mentioned is 5%, as stated in the allowance schedule in Section 3.
The allowance rate for Substandard—Secured loans is 6% to 25%. The exact percentage within the range is based on sound judgment considering factors such as nature/location of collateral (for real estate), borrower’s updated cash flow capacity to pay, credit rating, and industry expectations.
Doubtful loans require a 50% allowance, while Loss loans require a 100% allowance.
The allowance for probable losses shall be adjusted accordingly for additional allowance required by BSP, and Management is encouraged to provide additional allowance as it deems prudent and to formulate further specific guidelines within the described system.
Yes. The circular states it shall take effect immediately and that it supersedes other BSP rules inconsistent with its provisions.