Question & AnswerQ&A (BSP CIRCULAR NO. 247)
Banks must exercise proper caution to ascertain that the debtor is capable of fulfilling his commitments to the bank, as provided under Section 76 of R.A. No. 337, as amended.
Loans are qualitatively appraised and grouped as either Unclassified or Classified, with Classified loans further subdivided into Loans Especially Mentioned, Substandard, Doubtful, and Loss categories.
Unclassified loans are those without greater-than-normal risk where the borrower has the apparent ability to satisfy obligations in full, including loans secured by hold-outs on deposits, margin deposits, or government-supported securities, and loans with non-material technical defects in documentation or collateral.
Examples include loans with unregistered mortgage instruments, improperly executed supporting documents, unnotarized instruments, collaterals not covered by updated appraisal reports, loans exceeding approved credit lines, unapproved credit line availments, and loans with uninsured collaterals, among others.
Loans Especially Mentioned are those with potential weaknesses requiring close management attention, such as loans with unlocated collateral documents, lack of supporting board resolutions, missing credit investigation reports, deteriorating borrower financial conditions, loans past due between 30 and 90 days, or uncorrected miscellaneous exceptions from prior examinations.
Substandard loans involve substantial and unreasonable risk due to unfavorable records or characteristics, such as loans past due over 90 days, loans under litigation, loans without updated financial statements, signed promissory notes by unauthorized persons, and loans with significant weaknesses in collateral or borrower financial condition.
A loan is classified as Doubtful when it has all the weaknesses of Substandard loans but additional facts or conditions make full collection highly improbable, including lack of timely repayment, materially declined collateral value, or adverse claims on collateral titles, with possibility of loss highly probable.
Loss loans are considered uncollectible or worthless, such as past due clean loans unpaid for 6 months, borrowers insolvent or missing, worthless collaterals, loans absolutely uncollectible, or doubtful loans without significant repayment or positive credit updates over 12 months.
Allowances are: Unclassified – 0%, Loans Especially Mentioned – 5%, Substandard Secured – 6% to 25%, Substandard Unsecured – 25%, Doubtful – 50%, and Loss – 100%, with the exact percentage in Substandard Secured based on factors like collateral nature and borrower capacity.
Yes, management is encouraged to provide additional allowance as deemed prudent and to establish specific guidelines within the framework of the Circular. Allowances may be adjusted based on the BSP's requirements.