On 28 April 2023, the Bangko Sentral ng Pilipinas ("BSP") issued Memorandum No. M-2022-039 and clarified the definition of infrastructure projects for public use as indicated in Section 363-A of the Manual of Regulations for Banks ("MORB") on Limits on Real Estate Exposures of Universal and Commercial Banks.
1. What are the Real Estate Loan Limit and the Real Estate Stress Test?
Under Section 363-A(a) of the BSP's Manual of Regulations for Banks (the "MORB"), the "real estate loans" of a universal bank or commercial bank must not exceed twenty-five percent (25%) of its total loan portfolio, net of interbank loans.
Under Section 363-A(b) of the MORB, the "real estate exposure" of a universal bank or commercial bank must not exceed certain percentages of its capital. Currently, the thresholds are six percent (6%) of a universal bank or commercial bank's Common Equity Tier I capital ratio and ten percent (10%) of its risk-based capital adequacy ratio, on a solo and consolidated basis (after assuming that twenty-five percent (25%) of the bank's real estate exposure is written off).
2. What are considered "real estate loans"?
For purposes of determining compliance with the real estate loan limit, the term "real estate loans" (or "RELs") refers to loans granted to land developers, construction companies or other borrowers for the acquisition and development of land and/or construction of buildings and structures, including housing units for sale/lease and/or for use in retail/wholesale, manufacturing or other income-generating purposes, including loans for the land development and construction of residential properties. Purchases by banks of receivables under contracts to sell executed between the real estate developers and home buyers on a with recourse basis shall be considered loans to real estate developers and shall be classified as commercial RELs.
Technically, the MORB also classifies "loans extended to individual households for purposes of financing the acquisition, construction, and/or improvement of housing units and acquisition of any associated land that is or will be occupied by the borrower, regardless of amount" as RELs, but these are expressly excluded for purposes of determining compliance with the twenty-five percent (25%) limit. The following are also excluded in reckoning compliance with the REL limit:
- loans extended to land developers/construction companies for the purpose of development and/or construction of socialized and low-cost residential properties as defined under existing guidelines of the Department of Human Settlements and Urban Development for the implementation of government housing programs, which are intended for sale to individual households;
- loans to the extent guaranteed by the Philippine Guarantee Corporation; and
- loans to the extent collateralized by "non-risk assets," as defined by the BSP under existing regulations (e.g., cash, debt securities issued by the Bangko Sentral or the Philippine government, and deposits maintained in the lending bank and held in the Philippines).
3. What are considered part of the "real estate exposure" of a universal bank or commercial bank?
For purposes of determining compliance with the REST, the term "real estate exposure" refers to:
- commercial real estate loans, or loans granted for purposes of financing real estate activities to: (i) individuals, other than residential real estate loans granted to individual households for occupancy; (ii) land developers/construction companies; and (iii) other corporate borrowers, such as real estate brokers, real estate lessors, and property management companies;
- investments in debt securities issued by land developers/construction companies and other corporate borrowers for purposes of financing real estate activities; and
- investments in equity securities issued by land developers/construction companies and other corporate borrowers for purposes of financing real estate activities. Equity securities issued by holding companies are likewise covered, if proceeds from the issue shall be/has been invested by the holding company in its subsidiary corporation/s that is/are engaged in real estate activities.
"Real estate activities" refer to the acquisition, construction and improvement of real estate; buying and selling of real estate; rental of self-owned or leased real estate; and management of real estate/real property.
4. Are infrastructure loans included in determining compliance with the 25% REL limit and REST limit?
In addition to the loans mentioned in items (i) through (iii) in the response to question 2 above, for purposes of the 25% REL limit, RELs generally do not include "loans to finance infrastructure projects for public use." These are loans which "finance the construction, rehabilitation and improvement of highways, streets, bridges, tunnels, railways, railroad, transport systems, ports, airports, power plants, hydropower projects, canals, dams, water supply, irrigation, telecommunications, land reclamation projects, industrial estates or townships, government buildings and housing projects, public markets, slaughterhouses, warehouses, civil work components of information technology networks and database infrastructure projects, solid waste management, sewerage, flood control, drainage, dredging and other infrastructure projects that are intended for public use."
Similarly, for purposes of the REST, the real estate exposure of banks generally does not include loans and investments in debt and equity securities, the proceeds of which are used to finance "infrastructure projects for public use" (as defined above).
5. Are all loans and investments to finance infrastructure projects intended for public use excluded from the computation of RELs and real estate exposures that are subject to the prescribed REL and REST limits?
No, only loans and investments to finance the construction, rehabilitation and improvement of real estate relating to infrastructure projects that are intended for public use such as fixed assets, permanent structures, immovable facilities or physical improvements thereon shall be excluded.
6. What items relating to infrastructures intended for public use are not allowed to be excluded from the prescribed prudential limits on real estate and large exposures?
Loans and investments to finance the general administration and maintenance of operations of entities operating or working on such infrastructure projects including, among others, the cost of equipment, machineries and the like, as well as the services and related items are not allowed to be excluded from the prescribed prudential limits.
However, such loans and investments shall be excluded if the expenditure/cost is needed to build, rehabilitate, or improve an infrastructure project for public use and is allowed to be capitalized as part of the cost of the fixed asset, permanent structure, immovable facility, or physical improvement.
7. The MORB also provides that loans to finance telecommunications and civil work components of information technology networks and database infrastructure projects are excluded from RELs and real estate exposures of a bank for purposes of determining compliance with the REL and REST limits. What do these exclusions refer to?
These refer to the costs to construct, rehabilitate, and improve the related fixed assets, permanent structures, immovable facilities, or physical improvements thereon such as but not limited to the terrestrial and satellite stations, data center facilities, data recovery sites, or telecommunication towers. Loans to finance such costs are excluded from a universal bank or commercial bank's RELs and real estate exposures for purposes of the REL and REST limits.
However, expenses relating to the general administration and maintenance of operations of telecommunication and/or information technology companies including, among others, their expenditures for equipment and services and related items cannot be excluded from the prescribed prudential limits.
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