On June 9, 2023, the Monetary Board of the Bangko Sentral ng Pilipinas ("BSP") issued Circular No. 1174, amending the implementing regulations of the mandatory agricultural, fisheries and rural development financing contemplated by the Agriculture, Fisheries and Rural Development Financing Enhancement Act (Republic Act No. 11901 or the "Agri-Agra Reform Credit Act"). The implementing regulations were previously set out in BSP Circular No. 1159 dated November 4, 2022.
The Agri-Agra Reform Credit Act requires banks to set aside a minimum credit quota to finance the requirements of the Philippines' agricultural and fishing sectors. The statute repealed Republic Act No. 10000, which imposed a similar credit quota requirement. A general discussion of some of the more salient requirements under the Agri-Agra Reform Credit Act are discussed below.
1. What is the minimum agricultural and fisheries
household rural development financing ("AFRD financing")
requirement?
In line with the Philippine government's avowed policy of
enhancing access of rural communities and agricultural and
fisheries households to financial services and programs, the
Agri-Agra Reform Credit Act provides that all banking institutions,
whether government or private (except newly established banks for a
period of five years from the date of commencement of the
banks' operations) must set aside a credit quota (or a minimum
mandatory AFRD financing requirement) of at least twenty-five
percent (25%) of their "total loanable funds" generated
from and after August 18, 2023 (the second year of effectivity of
the Agri-Agra Reform Credit Act). The calculation of "total
loanable funds" is discussed in item 4 below.
At least ten percent (10%) of banks' total loanable funds shall be made available for agrarian reform beneficiaries.
Banks need to submit quarterly reports on their compliance with the AFRD financing requirement to the BSP. Compliance is allowed on a "groupwide basis" (i.e., consolidation of parent/foreign bank branch and subsidiary banks that are at least majority-owned) and any excess compliance of any bank in the group may be used as compliance by any deficient bank in the same group.
2. How long will the AFRD financing requirement
remain in effect?
Under the Agri-Agra Reform Credit Act, the AFRD financing
requirement shall cease to have effect on the 10th year from
approval of the statute (i.e., from July 28, 2022). As clarified in
BSP Circular No. 1159, the AFRD financing requirement will cease to
be effective on July 28, 2032.
3. What are the permissible modes of bank compliance
with the AFRD financing requirement?
Under Circular No. 1159 (as amended by Circular No. 11774), from
and after August 18, 2023, the modes by which banks may comply with
the AFRD financing requirement include the following:
a. actual extension of loans to rural community
beneficiaries for purposes of financing certain defined AFRD
activities (e.g., off-farm/fishery entrepreneurial activities,
agricultural mechanization/modernization, digitalization/automation
of farming, fishery, and agri-business activities and processes,
and public rural infrastructure);
b. purchase of eligible loans listed in item (a) above on
a without recourse basis from other banks and financial
institutions;
c. purchase of eligible securities (gross of allowance for
credit losses but net of unamortized premium or discount), such as
but not limited to the following: (i) investments in debt
securities issued by the Development Bank of the Philippines
("DBP") or Land Bank of the
Philippines ("LBP"), the
proceeds of which shall be used to finance certain defined AFRD
activities (see above) as well as electronic platforms that
facilitate agricultural value chain financing and agricultural
supply chain financing transactions; (ii) investments in
sustainable finance instruments, such as but not limited to green
bonds, the proceeds of which shall be used for sustainable projects
or programs that will benefit the country; (iii)
investments In shares of stock in rural financial institutions or
"RFIs" (i.e., financial
institutions established and operating in a rural community) and
the Philippine Crop Insurance Corporation (PCIC); and (iv)
investments in micro, small and medium enterprises of farmers,
fisherfolk, agrarian reform beneficiaries, tenant farmers, and
other beneficiaries contemplated by the Agri-Agra Reform Credit Act
by way of purchase of their securities through an organized market,
initial public offering, follow-on offering, or through registered
crowdfunding intermediaries:
d. grant of certain eligible loans and other credits
(gross of allowance for credit losses), such as the following:
(i) placements in deposit accounts and/or fixed term
deposit products with RFls; (ii) wholesale lending granted
by banks to RFls; (iii) rediscounting facility granted by
banks to other banks covering eligible AFRD financing;
(iv) actual extension of loans intended for the
construction and upgrading of infrastructure, such as but not
limited to, farm-to-market roads, post-harvest facilities and other
public rural infrastructure; and (v) actual extension of
loans to agri-business enterprises that maintain agricultural
commodity supply-chain arrangements directly with qualified rural
community beneficiaries.
Loans, other credits and investments that are considered as compliance with the mandatory AFRD financing shall not be funded by proceeds from the issuance of debt securities, investments in deposit accounts/fixed term deposit products. and/or loans that have already been counted as compliance with the mandatory credit by other banks.
Notably, loans that finance activities which generally benefit agrarian reform beneficiaries or "ARBs" (in general terms, an ARB is a farmer who was granted land under the Comprehensive Agrarian Reform Law), agrarian reform communities or "ARCs" (in general terms, an ARC is a barangay or cluster of barangays that is primarily composed of and managed by ARBs) or other identified priority sectors shall be counted at ten times their outstanding amount for purposes of determining compliance with the mandatory AFRD financing requirement.
4. How are a bank's "total loanable
funds" calculated?
In general terms, a bank's "total loanable funds" for
purposes of determining compliance with the AFRD financing
requirement are composed of the amount by which its deposits and
certain other accounts increased from August 18, 2023 (the
reference date adopted for the Agri-Agra Reform Credit Act), less
the amount by which its reserves against liabilities and provisions
for liquidity increased since the same date (or plus the amount by
which such reserves and provisions may have decreased since August
18, 2023).
As implemented by the BSP's current regulations, from August 18, 2023, a bank's "total loanable funds" shall be computed as follows:
(1) The net increase from August 18, 2023 to the date of the bank's report of the individual accounts booked under the Regular Banking Unit which represent the following:
a. Total peso deposits (such as
demand, savings, time and negotiable certificates of time deposit
accounts), excluding: (i) deposits of banks, (ii)
deposits of the national government, including its political
subdivisions and instrumentalities, and (iii) deposits of
government-owned and-controlled corporations
("GOCCs");
b. Bills payable excluding: (i) borrowings from the BSP in
the form of rediscounting, emergency advances, availment of
overdraft facilities, or other obligations, (ii)
borrowings from the national government, including its political
subdivisions and instrumentalities and GOCCs, (iii)
interbank loans payable, (iv) other borrowings, in the
form of (1) repurchase agreements with the BSP, national government
including its political subdivisions and instrumentalities, and
GOCCs, (2) repurchase agreements with banks, (3) certificates of
assignment/participation with recourse with banks, (4) securities
lending and borrowing agreements with banks, and (5) other
borrowings with banks; (v) other borrowings from special
on-lending programs for AFRD financing, (vi) other
borrowings from special financing programs other than for AFRD
financing, (vii) other deposit substitutes in the form of
emergency advances from the Philippine Deposit Insurance
Corporation, and (viii) other sustainable debt instruments
which are issued in accordance with domestic guidelines or
international standards pertaining to green or sustainable finance
accepted by the market, the proceeds of which shall be used for
sustainable projects or programs that will benefit the country,
and
c. Bonds payable, net of unamortized premium or discount excluding:
(i) bonds issued by the DBP and LBP, the proceeds of which
shall be used exclusively to finance certain AFRD activities
(e.g., off-farm/fishery entrepreneurial activities,
agricultural mechanization/modernization, digitalization/automation
of farming, fishery, and agri-business activities and processes,
and public rural infrastructure), and (ii) sustainable
bonds which are issued in accordance with domestic guidelines or
international standards pertaining to green or sustainable finance
accepted by the market, the proceeds of which shall be used for
sustainable projects or programs that will benefit the country,
(2) Less/(Add) the net increase/(decrease) from August 18, 2023 to the date of the bank's report of the required reserves against a week ago level of the reservable liabilities booked under the Regular Banking Unit (RBU); and
(3) Less/(Add) provisions for liquidity equivalent to five percent (5%) of the net increase/(decrease) since August 18, 2023 in the total peso deposit liabilities referred to in item (1) above.
5. Are syndicated types of ARD financing
allowed?
Yes. BSP regulations expressly state that banks may grant
syndicated types of AFRD financing, either between or among
themselves.
Banks that participate in such syndicated AFRD financing transactions may report compliance with the AFRD financing requirement up to the extent that eligible loans or debt instruments (see the modes of compliance discussed in item 3 above) are recorded in its books.
In the event a bank sells its exposure or participation in the syndicate to another bank, only the purchasing bank may report to sold participation as compliance with the AFRD requirement.
6. What are the penalties imposed for non-compliance
with the AFRD financing requirement?
Banks which fail to comply with the minimum AFRD financing
requirement (e.g., noncompliance or undercompliance with
the requirement, or failure to submit the required reports, or
filing false reports) may be subjected to certain monetary fines
and administrative sanctions by the BSP (without prejudice to any
applicable criminal charges).
Similarly, directors and officers of banks that are found to have willfully falsely certified or submitted misleading statements, or which otherwise willfully violated the implementing regulations of the Agri-Agra Reform Credit Act, may be subjected to monetary penalties, administrative sanctions, and/or criminal charges.
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.