Law Summary
Classification of Loans
- Loans are classified by status: Current or Past Due, and qualitatively as Unclassified or Classified.
Unclassified Loans
- Loans without above-normal risk; no anticipated loss in collection.
- Include loans secured by institution deposits, margin deposits, or government-supported securities.
- Loans with minor technical/documentation defects that do not materially affect repayment capability.
- Examples of documentation deficiencies include unregistered mortgage instruments, unnotarized agreements, loans beyond credit line limits, inadequate insurance, and other administrative exceptions.
- Deficiencies uncorrected by the next examination are classified as "Loans Especially Mentioned".
Classified Loans
- Loans possessing risk factors compromising full repayment.
- Subdivided into: Loans Especially Mentioned, Substandard, Doubtful, and Loss.
Loans Especially Mentioned
- Loans with potential weaknesses requiring management attention.
- Characteristics: missing collateral documents, missing borrower authorization, lack of credit reports, outdated financial statements, economic conditions threatening repayment, reduced collateral values, payment delays between 30 and 90 days, and uncorrected previous exceptions.
Substandard Loans
- Loans with substantial risk and clear weaknesses jeopardizing liquidation.
- Secured loans: past due with imminent foreclosure, declining collateral value, or borrower's negative net worth.
- Unsecured loans: extended loans with deteriorating financial condition and insufficient principal repayment, past due for over 90 days.
- Include loans under litigation, unsecured loans without latest financials, unsigned or unauthorized promissory notes.
- Previous "Loans Especially Mentioned" uncorrected in current examination.
Doubtful Loans
- Loans with substandard weaknesses plus high improbability of full collection.
- Includes past due substandard loans without principal repayment over 12 months.
- Collateral materially declined without additional collateral.
- Real estate with titles subject to adverse claims.
- Loans with high loss probability but pending factors potentially improving status.
Loss Loans
- Loans considered uncollectible or of negligible value.
- Includes past due clean loans unpaid for 6 months, loans with insolvent borrowers, worthless collateral, or highly improbable collection.
- Includes loans classified as doubtful in previous examination with no payments or reduction in principal.
Allowance for Probable Losses
- Mandatory allowance set based on loan classification:
- Unclassified: 0%
- Loans Especially Mentioned: 5%
- Substandard Secured: 6% to 25% (based on collateral nature and borrower capacity)
- Substandard Unsecured: 25%
- Doubtful: 50%
- Loss: 100%
- Adjustments required based on BSP directives.
- Banks encouraged to provide additional allowances as prudent.
Effectivity and Supersession
- This circular supersedes inconsistent BSP rules.
- Took immediate effect upon adoption on June 2, 2000.