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Manual of Regulations for Banks Part III - Page 1

X301 - 1301.109.12.31

PART THREE

LOANS, INVESTMENTS AND SPECIAL CREDITS

Section X301 Lending Policies. It shall bethe responsibility of the board of directorsof a bank to formulate written policies onthe extension of credit and riskdiversification and to set the guidelines forevaluation of risk assets. Well-definedlending policies and sound lendingpractices are essential if a bank is to performits lending function effectively andminimize the risk inherent in any extensionof credit. The responsibility should beapproached in a way that will provideassurance to the public, the stockholdersand supervisory authorities that timely andadequate action will be taken to maintainthe quality of the loan portfolio and otherrisk assets.

X301.1 (Reserved)

1301.1 Rules and regulations to governthe development and implementation ofbanks internal credit risk rating systems

a. Statement of policy. It is the policyof the BSP to ensure that banks credit riskmanagement processes are sound andeffective. Towards this end, the followingrules and regulations that shall govern theuse of banks internal credit risk ratingsystems are hereby prescribed.

b. Scope. UBs and KBs must have inplace a formal internal credit risk ratingsystem for the underwriting and ongoingadministration, initially, of corporate creditexposures. The internal credit risk ratingsystem must be appropriate to a banksnature, complexity and scale of activities.

Initially and until such time that theMonetary Board prescribes otherwise,corporate credit exposure shall be definedas exposures to companies with assets ofmore than P15.0 million.

c. Minimum operational requirements(1) A banks internal credit r isk

rating system must be duly approved bythe board of directors (or equivalentmanagement committee in the case ofPhilippine branches of foreign banks).The board should exercise appropriateoversight over the system in a consistentmanner.

(2) A banks internal credit risk ratingsystem must be operationally integrated intoits internal credit risk management process.Its output should accordingly be an integralpart of the process of evaluation and reviewof prospective and existing exposures,respectively. Credit underwriting criteriashould become progressively moreconservative as credit rating declines. Allcredit decisions must be supported by awritten assessment. In the context ofongoing review, provisioning standardsmust be rationally tied to the internal creditrating system.

(3) Banks must have an independentcredit risk control function that isresponsible for the design, implementationand performance of their credit risk ratingsystems. The credit risk control functionmust be independent from the businessfunctions responsible for originatingexposures.

(4) Internal ratings must be an essentialpart of annual or more frequent reportingof banks changing portfolio quality overtime to the board of directors (or equivalentmanagement committee in the case ofPhilippine branches of foreign banks).Reporting must include portfoliobreakdown by credit grade, major portfoliosegments breakdown by credit grade, andanalysis of realized default rates againstexpectations.

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1301.109.12.31

(5) Internal and external audit must alsoreview at least annually the banks internalrating system and its operations, including theoperations of the credit risk control function.

d. Minimum technical standards(1) Banks must fully document their

internal credit risk rating systems. Thedocumentation must address topics such ascoverage, rating criteria, responsibilities ofparties involved in the ratings process,definition of what constitutes a ratingexception, parties that have authority toapprove exceptions, frequency of ratingreviews, and management oversight of therating process. A bank must document therationale for its choice of rating criteria andmust be able to provide analysesdemonstrating that the rating criteria andprocedures are likely to result in ratings thatmeaningfully differentiate risk.

(2) The rating criteria should reflect anestablished blend of qualitative andquantitative factors. Transparent ranges needto be set for the quantitative standards basedon experience. The quantitative criteria mustinclude leverage and cash flow standards.

(3) Banks must maintain ratinghistories on individual accounts, whichshall include the ratings of the account,the dates the ratings were assigned, themethodology and key data used to derivethe ratings and the analyst who gave theratings. The identity of borrowers andfacilities that default, and the timing andcircumstances of such defaults, must beretained. Banks must also retain data onthe realized default rates associated withrating grades and ratings migration inorder to eventually track the predictivepower of the risk rating system.

(4) A banks internal credit risk ratingsystem must have a minimum of 6 ratinggrades for unclassified accounts and 4 ratinggrades for classified accounts, which mustbe assigned in a consistent manner overtime. Moreover, the rating system must

result in a meaningful distribution ofexposures across grades with no excessiveconcentrations on a single rating grade.

(5) The ratings output of banksinternal credit risk rating systems mustcontain both a borrower and a facilitydimension. The borrower dimension shouldfocus on factors that affect the inherentcredit quality of each borrower. The facilitydimension, on the other hand, should focuson security/collateral arrangements andother similar risk influencing factors of eachtransaction.

(6) In rating corporate borrowers withtotal assets of more than P15.0 million, onlyfinancial statements audited by externalauditors that are accredited/selected bythe SEC, the BSP or the InsuranceCommission (IC) shall be used startingwith the annual financial statementsending 31 December 2006.1

e. Definition of default and loss. Inconnection with the data collectionexercise prescribed under this Subsection,banks shall be guided by the followingstandard definitions of default and loss:

(1) Definition of defaultA default is considered to have

occurred in the following cases:(a) If a credit obligation is considered

non-performing under existing rules andregulations;

(b) If a borrower/obligor has sought orhas been placed in bankruptcy, has beenfound insolvent, or has ceased operationsin the case of businesses;

(c) If the bank sells a credit obligation ata material credit-related loss, i.e., excludinggains and losses due to interest ratemovements. Banks board-approved internalpolicies that govern the use of their internalrating systems must specifically define whena material credit-related loss occurs; and

(d) If a credit obligation of a borrower/obligor is considered to be in default, allcredit obligations of the borrower/obligor

1 The Monetary Board approved the one (1) year suspension of the requirement on the use of AFS audited by accreditedexternal auditors for banks internal credit rating system starting fifteen (15) days after 18 May 2009 (publication date).


with the same bank shall also be consideredto be in default.

(2) Definition of lossLoss, for purposes of accumulating data

on loss in the event of default, refers toeconomic loss. It must therefore includediscount effects, as well as direct and indirectcosts associated with collecting on the creditobligation. Banks board-approved internalpolicies that govern the use of their internalrating systems must include specific policiesand procedures that should be followed inthe determination of economic loss.

f. Timetable for implementation(1) Banks must submit an

implementation plan to the appropriatedepartment of the SES no later than 31 July2004. A monetary penalty of P10,000 perday shall be imposed for delay until suchplan is submitted.

(2) A fully documented internal credit riskrating system, duly approved by the board ofdirectors, must be submitted to the BSP notlater than 31 December 2004. Uponsubmission of the system, all prospective andexisting corporate accounts must immediatelybe evaluated and monitored according to suchsystem. A monetary penalty of P10,000 perday shall be imposed for delay until thisrequirement is complied with.(As amended by Circular Nos. 655 dated 12 May 2009, 585 dated15 October 2007 and 531 dated 17 May 2006)

2301.1 (Reserved)

3301.1 (Reserved)

X301.2 - X301.5 (Reserved)

X301.6 Large exposures and creditrisk concentrations. The followingguidelines shall govern managing largeexposures and credit risk concentrations inline with the objective of strengthening riskmanagement in the banking system.

a. General principles(1) A bank can be exposed to various

forms of credit risk concentration which if

not properly managed may cause significantlosses that could threaten its financialstrength and undermine public confidencein the bank.

(2) Credit risk concentrations may arisefrom excessive exposures to individualcounterparties, groups of related counterpartiesand groups of counterparties with similarcharacteristics (e.g., counterparties in specificgeographical locations, economic or industrysectors).

(3) Diversification of risk is essential inbanking. Many past bank failures have beendue to credit risk concentrations of somekind. It is essential for banks to preventundue credit risk concentrations fromexcessive exposures to particularcounterparties, industries, economic sectors,regions or countries.

(4) While concentration of credit risksare inherent in banking and cannot betotally eliminated, they can be limited andreduced by adopting proper risk control anddiversification strategies. Safeguardingagainst credit risk concentrations shouldform an important component of a banksrisk management system.

(5) The board of directors of a bankshall be responsible for establishing andmonitoring compliance with policiesgoverning large exposures and credit riskconcentrations of the bank. The boardshould review these policies regularly (atleast annually) to ensure that they remainadequate and appropriate for the bank.Subsequent changes to the establishedpolicies must be approved by the board.

(6) The policy on large exposures andcredit risk concentrations shall, at aminimum, cover the following:

(a) Exposure limits that are reasonablein relation to capital and resources for -

(i) Various types of borrowers/counterparties (e.g., government, banksand other FIs, corporate and individualborrowers);

(ii) A group of related borrowers/counterparties;

1301.1 - X301.609.12.31


(iii) Individual industry sectors;(iv) Individual countries; and(v) Various types of investments.(b) The circumstances in which the

above limits can be exceeded and the partyauthorized to approve such excesses, e.g.,the banks board of directors or creditcommittee with delegated authority from theboard;

(c) The delegation of credit authoritywithin the bank for approving largeexposures;

(d) The procedures for identifying,reviewing, managing and reporting largeexposures of the bank;

(e) The definition of exposure. Banksshould take into account the nature of theirbusiness and the complexity of theirproducts. In any case, a banks exposuresto a counterparty should include its on andoff-balance sheet exposures and indirectexposures; and

(f) The cri teria to be used foridentifying a group of related persons.

(7) The board and senior managementof a bank should ensure that:

(a) Adequate systems and controls arein place to identify, measure, monitor andreport large exposures and credit riskconcentrations of the bank in a timelymanner; and

(b) Large exposures of the bank arekept under regular review. Largeexposures shall refer to exposures to acounterparty or a group of relatedcounterparties equal or greater than fivepercent (5%) of banks qualifying capital asdefined under Sec. X116.

(8) A bank should, where appropriate,conduct stress testing and scenario analysisof its large exposures to assess the impactof changes in market conditions or key riskfactors (e.g. economic cycles, interest rate,liquidity conditions or other marketmovements) on its profile and earnings.

(9) It is expected that banks wouldgenerally observe a lower internal singleborrowers limit than the prescribed limit of

twenty-five percent (25%) as a matter ofsound practice.

b. Monitoring of large exposures/credit risk concentrations

(1) Banks should have a centralliability record (preferably based onautomated system) for each loan exposure.Banks should be able to monitor suchexposures against prescribed and internallimits on a daily basis.

(2) Every bank should have adequatemanagement information and reportingsystems that enable management toidentify credit risk concentrations withinthe asset portfolio of the bank or of thegroup (including subsidiaries and overseasbranches) on a timely basis. If aconcentration does exist, banks shouldreduce it in accordance with theirprescribed policies. Large exposures shallbe subject to more intensive monitoring.

(3) Banks should ensure that theirinternal or external auditors conduct at leastan annual review of the quality of largeexposures and controls to safeguard againstcredit risk concentrations. Their reviewshould ascertain whether:

(a) The banks relevant policies, limitsand procedures are complied with; and

(b) The existing policies and controlsremain adequate and appropriate for thebanks business.

(4) Management should take promptcorrective action to address concerns andexceptions raised.

(5) There should also be anindependent compliance function toensure that all relevant internal andprescribed requirements and limits arecomplied with. Breaches of prescribedrequirements and deviations fromestablished policies and limits should bereported to senior management in a timelymanner.

c. Unsafe and unsound practiceNon-observance of the principles and

the requirements of Items a and b abovemay be a ground for a finding of unsafe

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Manual of Regulations for Banks

and unsound practice under Section 56 ofthe General Banking Law of 2000(Appendix 48) and may be subject toappropriate sanction as may be determinedby the Monetary Board.

d. Notification requirementsA bank must inform BSP immediately

when it has concerns that its large exposuresor credit risk concentrations have thepotential to impact materially upon itscapital adequacy, along with proposedmeasures to address these concerns.

e. ReportingBanks records on monitoring of large

exposures shall be made available to theBSP examiners for verification at any giventime. When warranted, the BSP mayimpose additional reporting requirementson bank in relation to its large exposuresand credit risk concentrations.

f. SanctionAny failure or delay in complying with

the requirements under Items d and eof this Subsection shall be subject topenalty applicable to those involvingmajor reports.

Sec. X302 Loan Portfolio and Other RiskAssets Review System. To ensure thattimely and adequate management actionis taken to maintain the quality of the loanportfolio and other risk assets and thatadequate loss reserves are set up andmaintained at a level sufficient to absorbthe loss inherent in the loan portfolio andother risk assets, each bank shall establisha system of identifying and monitoringexisting or potential problem loans andother risk assets and of evaluating creditpolicies vis--vis prevailing circumstancesand emerging portfolio trends.Management must also recognize that lossreserve is a stabilizing factor and that failureto account appropriately for losses or makeadequate provisions for estimated futurelosses may result in misrepresentation ofthe banks financial condition.

The system of identifying and monitoringproblem loans and other risk assets andsetting up of allowances for probable lossesshall include, but is not limited to, theguidelines mentioned in Appendix 18.(As amended by Circular Nos. 622 dated 16 September 2008,603 dated 03 March 2008 and 520 dated 20 March 2006)

X302.1 Provisions for losses; bookingThe board of directors of banks areresponsible for ensuring that their institutionshave controls in place to determine theallowance for probable losses on loans,other credit accommodations, advancesand other assets consistent with theinstitutions stated policies and procedures,generally accepted accounting principles(GAAP), the BSP rules and regulations andthe safe and sound banking practices. Theboard of directors, in fulfilling thisresponsibility, shall require managementto develop and maintain an appropriate,systematic and uniformly applied processconsistent and in compliance withexisting BSP rules and regulations todetermine the amount of reserves for baddebts or doubtful accounts or othercontingencies.

The specific allowance for probablelosses for classified loans and other riskassets and the general loan loss provisionas required in Appendix 18 shall be set upimmediately.

X302.2 Sanctions. Non-compliancewith the requirement to book valuationreserves required under the precedingSubsection shall be a ground for theimposition of any or all of the followingsanctions:

a. Denial of the request for authorityto establish new banking offices regardlessof type or category;

b. Denial of access to BSP creditfacilities except as may be allowed underSection 84 of R. A. No. 7653; and

c. Fine of P10,000 a day for UBs and

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KBs, P5,000 for TBs and P500 for RBs/CoopBanks, counted as follows:

(1) from the date the bank has beeninformed that the recommendation of theappropriate department of the SES has beenconfirmed by the Monetary Board up to thedate that said recommended valuationreserves had been actually booked, in thecase of allowance for probable losses forloans and other risk assets classified assubstandard unsecured, doubtful and lossas required by the BSP; and

(2) from the dates prescribed under thisSection up to the date of the actual bookingin cases of the two percent (2%) generalprovision for probable losses, the twenty-five percent (25%) allowance for probablelosses on secured loans classified assubstandard, and the five percent (5%)allowance for probable losses on loansespecially mentioned.

A. LOANS IN GENERAL

Sec. X303 Credit Exposure Limits to aSingle Borrower

a. Consistent with national interest,the total amount of loans, creditaccommodations and guarantees that maybe extended by a bank to any person,partnership, association, corporation orother entity shall at no time exceed twentyfive percent (25%) of the net worth of suchbank. The basis for determiningcompliance with the single borrowers limit(SBL) is the total credit commitment of thebank to or on behalf of the borrower.

b. The total amount of loans, creditaccommodations and guaranteesprescribed in the first paragraph may beincreased for each of the followingcircumstances:

1. By an additional ten percent (10%) ofthe net worth of such bank: Provided, Thatthe additional liabilities are adequatelysecured by trust receipts, shippingdocuments, warehouse receipts or other

similar documents transferring or securingtitle covering readily marketable, non-perishable goods which must be fullycovered by insurance; and

2. By an additional twenty-five percent(25%) of the net worth of such bank:Provided, That the additional loans, creditaccommodations and guarantees are for thepurpose of undertaking infrastructure and/or development projects under the Public-Private Partnership (PPP) Program of thegovernment duly certified by the Secretaryof Socio-Economic Planning: Provided,further, That the total exposures of the bankto any borrower pertaining to suchinfrastructure and/or development projectsunder the PPP Program shall not exceedtwenty-five percent (25%) of the net worthof such bank: Provided, furthermore, Thatthe additional twenty-five percent (25%)shall only be allowed for a period ofthree (3) years from the 28 December 2010: Provided, finally, That the credit riskconcentration arising from total exposuresto all borrowers pertaining to suchinfrastructure and/or development projectsunder the PPP Program shall be consideredby the bank in its internal assessment ofcapital adequacy relative to its overall riskprofile and operating environment. Saidloans, credit accommodations andguarantees based on the contracted amountas of the end of the three (3)-year periodshall not be increased but may be reducedand once reduced, said exposures shall notbe increased thereafter.

c. The above prescribed ceilings shallinclude: (1) the direct liability of the makeror acceptor of paper discounted with or soldto such bank and the liability of a generalendorser, drawer or guarantor who obtainsa loan or other credit accommodation fromor discounts paper with or sells papers tosuch bank; (2) in the case of an individualwho owns or controls a majority interest ina corporation, partnership, association orany other entity, the liabilities of said entities

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to such bank; (3) in the case of acorporation, all liabilities to such bank ofall subsidiaries in which such corporationowns or controls a majority interest; and(4) in the case of a partnership, associationor other entity, the liabilities of the membersthereof to such bank.

d. Even if a parent corporation,partnership, association, entity or anindividual who owns or controls a majorityinterest in such entities has no liability tothe bank, the liabilities of subsidiarycorporations or members of the partnership,association, entity or such individual shallbe combined under certain circumstances,including but not limited to any of thefollowing situations: (1) the parentcorporation, partnership, association, entityor individual guarantees the repayment ofthe liabilities; (2) the liabilities were incurredfor the accommodation of the parentcorporation or another subsidiary or of thepartnership or association or entity or suchindividual; or (3) the subsidiaries thoughseparate entities operate merely asdepartments or divisions of a single entity.

e. For purposes of this Section, loans,other credit accommodations andguarantees shall exclude: (1) loans and othercredit accommodations secured byobligations of the BSP or of the PhilippineGovernment; (2) loans and other creditaccommodations fully guaranteed by thegovernment as to the payment of principaland interest; (3) loans and other creditaccommodations secured by U.S.Treasury Notes and other securities issuedby central governments and central banksof foreign countries with the highest creditquali ty given by any two (2)internationally accepted rating agencies;(4) loans and other credit accommodationsto the extent covered by the hold-out on orassignment of, deposits maintained in thelending bank and held in the Philippines;(5) loans, credit accommodations andacceptances under letters of credit to the

extent covered by margin deposits; and(6) other loans or credit accommodationswhich the Monetary Board may from timeto time specify as non-risk items.

f. The wholesale lending activities ofgovernment banks to participating financialinstitutions (PFIs) for relending to end-userborrowers shall at no time exceed a separatelimit of thirty-five percent (35%) of networth, subject to the following guidelines:(1) it shall apply only to loans granted toPFIs on a wholesale basis for on-lending toend-user borrowers; (2) it shall apply onlyto loan programs funded by multilateral,international or local development agencies,organizations or institutions especiallydesigned for wholesale lending activities ofgovernment banks; (3) the end-userborrowers of the PFIs shall be subject to thetwenty-five percent (25%) SBL, not theincreased ceiling of thirty-five percent(35%); and (4) government banks shallobserve appropriate criteria for accreditingPFIs and for the grant/renewal of credit linesto accredited PFIs.

g. Loans and other creditaccommodations as well as depositsmaintained with, and usual guarantees by abank to any other bank or non-bank entity,whether locally or abroad, shall be subjectto the limits as herein prescribed.

Deposits of RBs/Coop Banks withgovernment-owned or controlled financialinstitutions like the LBP and the DBP shallnot be covered by the SBL imposed underR.A. No. 8791.

In municipalities and cities where thereare no government banks, the deposits ofRBs/Coop Banks in private banks in saidareas shall not be subject to the SBL.Deposits in private banks located in othermunicipalities/cities shall be covered by theSBL.

The outstanding balance of the depositin a private depository bank being used bythe TBs/RBs/Coop Banks with authority toaccept/create demand or current deposits,

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to fund checks cleared through the saidprivate depository bank shall also be exemptfrom the SBL even if there is a government-owned or controlled financial institution inthe area.(As amended by Circular no. 700 dated 06 December 2010)

X303.1 Definition of terms. Forpurposes of this Section, the followingdefinitions shall apply:

a. Total credit commitment shallinclude outstanding loans and other creditaccommodations, deferred letters of creditless margin deposits, and guarantees.Except as specifically provided, total creditcommitment shall be reckoned on creditrisk-weighted basis consistent with existingregulations.

b. Loans shall refer to all the accountsunder the loan portfolio of a bank asenumerated in the Manual of Accounts forBanks.

c. Other credit accommodations shallrefer to credit and specific market riskexposures of banks arising fromaccommodations other than loans such asreceivables (sales contract receivables,accounts receivables and other receivables),and debt securities booked as investments.

d. Bank guarantee. A bank guaranteeis an irrevocable commitment of a bankbinding itself to pay a sum of money in theevent of non-performance of a contract by athird party. The guarantee is a commitmentseparate and distinct from the principal debtor contract.

e. Net worth shall mean the total ofthe unimpaired paid-in capital includingpaid-in surplus, retained earnings andundivided profit, net of unbooked valuationreserves and other adjustments as may berequired by the BSP.

f. Qualifying capital shall mean capitalunder Sec. X116.

g. The term control of majorityinterest shall be synonymous to controllinginterest and exists when the parent owns

directly or indirectly through subsidiariesmore than one half of the voting power ofan enterprise unless, in exceptionalcircumstance, i t can be clearlydemonstrated that such ownership doesnot constitute control. Control of majorityinterest may also exist even when theparent owns one-half or less of the votingpower of an enterprise when there is:

(1) Power over more than one-half ofthe voting rights by virtue of an agreementwith other investors; or

(2) Power to govern the financial andoperating policies of the enterprise under astatute or an agreement; or

(3) Power to appoint or remove themajority members of the board of directorsor equivalent governing body; or

(4) Power to cast the majority votes atmeetings of the board of directors orequivalent governing body; or

(5) Any other arrangement similar toany of the above.

h. Subsidiary shall refer to acorporation or firm more than fifty percent(50%) of the outstanding voting stock ofwhich is directly or indirectly owned,controlled or held with power to vote by itsparent corporation.

i. Credit risk transfer shall refer toany arrangement that allows the bank totransfer the credit risk associated with itsloan or other credit accommodation to athird party.

j. Readily marketable goods shallmean articles of commerce, agriculture orindustry of such uses as to make them thesubject of constant dealings in readymarkets with such frequent quotations asto make their prices easily and definitelyascertainable, or which lend themselveseasily to disposal by sale at any time topay the obligations secured by the saidgoods.

k. Bill of exchange drawn in good faithagainst actually existing values shall meanone (1) which is drawn by a seller on the

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purchaser for the purchase price ofcommodities sold. A bill of exchange,whether drawn against goods for exportsor against goods to be sold locally, whichis discounted or purchased by a bank is abill drawn against existing values onlywhen it is accompanied by shippingdocuments, warehouse receipts or otherpapers, securing title to the goods sold.However, bills of exchange drawn ingood faith against actually existing valuesas defined in this paragraph, which arepast due or the maturities of which havebeen extended, shall be considered asadditional loans authorized under thesecond paragraph of this section and shall

be subject to the ten percent (10%)limitation provided therein.

l. Commercial or business paperactually owned by the person negotiatingthe same shall mean a paper arising froman actual business transaction. A tradeacceptance or promissory note actuallyowned by the person negotiating the sameis a commercial or a business paper.However, if a bill is drawn against an agentor fictitious drawee, or if a promissorynote is executed by an agent or fictitiousdrawee, neither is a commercial nor abusiness paper. Commercial or businesspapers actually owned and discounted bythe person negotiating the same, which are

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past due or the maturity of which have beenextended, shall be considered as moneyborrowed and shall be subject to thelimitation of twenty-five percent (25%)provided in the first paragraph of thisSection: Provided, That commercial orbusiness papers purchased by banks fromSMEs which became past due or thematurities of which have been extended,shall be considered additional loan by thebank to the purchaser of goods or servicesfrom the SME and shall be entitled to anincreased SBL equivalent to ten percent(10%) of the net worth of the concernedbank if the purchasers are companies withcredit ratings of at least AA- or equivalentfrom a BSP-recognized rating agency.

X303.2 Rediscounted papersincluded in loan limit. The liabilities to thebank of borrowers whose papers wererediscounted by banks with the BSP shallnot be deemed as having beenextinguished by the rediscount, but shallbe considered as still existing and shall beincluded in determining the SBL until suchpapers are paid by the borrowers.

X303.3 Credit risk transfer. Subjectto prior approval of the BSP, loans and othercredit accommodations covered by a legallyeffective credit risk transfer arrangementsuch as guarantee, letter of indemnity,standby letter of credit or credit derivative,may be excluded from the total creditcommitment of the bank to a borrower inreckoning compliance with the SBL.

X303.4 Exclusions from loan limita. The discount of bills of exchange

drawn in good faith against actually existingvalues, and the discount of commercial orbusiness paper which are actually ownedby the person, company, corporation orassociation negotiating the same;

b. Credit accommodations to financethe importation of rice and corn to the

extent of 100% of the net worth of the bankconcerned shall be excluded indetermining the SBL prescribed herein,subject to the following conditions:

(1) The importation shall be made inpursuance of a national policy dulyenunciated by the National Government;

(2) The importation shall have beenapproved by the National EconomicDevelopment Authority (NEDA);

(3) The letter of credit shall specify thatimportation shall be made with certificationfrom the National Food Authority (NFA),or the consular establishment of thePhilippine government at the source of anysuch establishment of the Philippinegovernment at the source of any suchshipment to the effect that the commoditybeing imported is either rice or corn; and

(4) The related bills of lading shallspecify in addition to the name of theimporter concerned, that the NFA shall bethe consignee of the shipment;

c. The portion of loans and other creditaccommodations covered by the guaranteeof IGLF;

d. The total liabilities of a commercialpaper issuer for commercial paper held bya UB as a firm underwriter shall not becounted in determining compliance withthe SBL within a period of 180 days fromthe acquisition of the commercial paper bythe UB: Provided, That in no case shall suchliabilities exceed five percent (5%) of thenet worth of the UB beyond the normalapplicable SBL;

e. The portion of loans and othercredit accommodations covered byguarantees of international/regionalinstitutions/multi-lateral FIs where thePhilippine Government is a member/shareholder, such as the IFC and the ADB;

f. Loans and other creditaccommodations or portion thereof,specifically provided for with valuationreserve: Provided, That the bank has nounbooked valuation reserves;

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g. Loans and other creditaccommodations as a result of anunderwriting or sub-underwritingagreement of debt securities outstandingfor a period not exceeding thirty (30)calendar days;

h. Loans granted to foreign embassies.These loans are considered as loans to theirrespective central governments and as suchshall be considered non-risk; and

i. Foreign securities lending underSec. X531 and other domestic securitieslending programs duly recognized by theBSP containing safeguards consistent withbest international practices, to protectsecurities lenders risk exposures.(As amended by Circular Nos. 578 dated 17 August 2007 and550 dated 17 November 2006)

X303.5 Sanctions. Violations of theprovisions of this Section shall be subjectto the following:

a. Monetary penalties - Fines of one-tenth of one percent (1/10 of 1%) of theexcess over the ceiling but not to exceedP30,000.00 a day for each SBL violationshall be assessed on the bank to bereckoned from the date the excess startedup to the date when such excess waseliminated: Provided, That a maximum fineof P500.00 a day for each violation shall beimposed against banks with total resourcesof less than P50.0 million at the time ofgranting of loan/credit accommodation.

b. Other sanctionsFirst Offense Reprimand for the

directors/officers who approved the creditavailment which resulted in the excess witha warning that subsequent violations willbe subject to more severe sanctions.

Subsequent offenses (1) Fine of P1,000.00 for directors/

officers who approved the credit availmentwhich resulted in the excess.

(2) Suspension of the banks branchingprivileges and access to BSP rediscountingfacilities until the excess is eliminated.

(3) Other penalties as the MonetaryBoard may impose depending on thegravity of the offense.

Transitory provision. Outstandingcredit commitments of a bank as of 02 May2004 which are within the ceilingprescribed under the regulations existingprior to said date but will exceed thelimitations prescribed in this Section shallnot be subject to penalty for a period ofone (1) year or until said creditcommitments become past due or areextended, renewed or restructuredwhichever comes later. Said creditcommitments shall, however, be reportedto the BSP within fifteen (15) banking daysfrom 02 May 2004.

X303.6 X303.7 (Reserved)

X303.8 Limit for wholesale lendingactivities of government banks. Thereshall be a separate SBL of thirty-five percent(35%) of unimpaired capital and surplus forthe wholesale lending activities ofgovernment banks to PFIs for relending toend-user borrowers, subject to thefollowing guidelines:

a. Government banks SBL of thirty-five percent (35%) of unimpaired capitaland surplus shall apply only to loansgranted to PFIs on a wholesale basis foron-lending to end-user borrowers;

b. The thirty-five percent (35%) SBLshall apply only to loan programs funded bymultilateral, international or localdevelopmental agencies, organizations orinstitutions specially designed for wholesalelending activities of government banks;

c. The end-user borrowers of the PFIsshall be subject to the twenty-five percent(25%) SBL, not to the increased ceiling ofthirty-five percent (35%); and

d. Government banks shall observethe minimum criteria for accrediting PFIsand for the grant/renewal of credit lines toaccredited PFIs as set forth in Appendix 41.

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Sec. X304 Grant of Loans and Other CreditAccommodations. The following regulationsshall be observed in the grant of loans andother credit accommodations.

X304.1 General guidelines. Consistentwith safe and sound banking practices, abank shall grant loans or other creditaccommodations only in amounts and forthe periods of time essential for theeffective completion of the operation to befinanced.

Before granting loans or other creditaccommodations, a bank must ascertainthat the borrower, co-maker, endorser,surety and/or guarantor, if applicable,is/are financially capable of fulfillinghis/their commitments to the bank. Forthis purpose, a bank shall obtain adequateinformation on his/their credit standingand financial capacities.

In addition to the usual informationsheet about the borrower, a bank shallrequire from the credit applicant thefollowing:

a. A copy of the latest ITR of theborrower and his co-maker, if applicable,duly stamped as received by the BIR;

b. Except as otherwise provided bylaw and in other regulations, if theborrower is engaged in business, a copyof the borrowers latest financialstatements as submitted for taxationpurposes to the BIR; and

c. A waiver of confidentiality of clientinformation and/or an authority of the bankto conduct random verification with theBIR in order to establish authenticity of theITR and accompanying financial statementssubmitted by the client.

The documents under Items a andb above shall be required to be submittedannually for as long as the loan and/orcredit accommodation is outstanding. Theconsistency of the data/figures in said ITRs

and financial statements shall also bechecked and considered in the evaluationof the financial capacity andcreditworthiness of credit applicants. Thewaiver of confidentiality of clientinformation and/or an authority of the bankto conduct random verification with the BIRneed not be submitted annually since oncesubmitted these documents remain validunless revoked.

Should the document(s) submittedprove to be spurious or incorrect in anymaterial detail, the bank may terminate anyloan or other credit accommodationgranted on the basis of said document(s)and shall have the right to demandimmediate repayment or liquidation of theobligation. Moreover, the bank may seekredress from the court for any harm doneby the borrowers submission of spuriousdocuments.

The required submission of additionaldocuments shall cover loans, other creditaccommodations, and credit lines granted,restructured, renewed or extended after02 November 2006 including anyavailment and/or re-availment againstexisting credit lines, except:

(1) Microfinance loans as defined underSubsec. X361.1 (a);

(2) Loans to registered BarangayMicro-Business Enterprises (BMBEs);

(3) Interbank loans;(4) Loans secured by hold-outs on or

assignment of deposits or other assetsconsidered non-risk by the MonetaryBoard;

(5) Loans to individuals who are notrequired to file ITRs under BIR regulations,as follows:

(a) Individuals whose grosscompensation income does not exceedtheir total personal and additionalexemptions, or whose compensationincome derived from one (1) employer

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does not exceed P60,000 and the incometax on which has been correctly withheld;

(b) Those whose income has beensubjected to final withholding tax;

(c) Senior citizens not required to file areturn pursuant to R.A. No. 7432, asamended by R.A. No. 9257, in relation tothe provisions of the National InternalRevenue Code (NIRC) or the Tax ReformAct of 1997; and

(d) An individual who is exempt fromincome tax pursuant to the provisions ofthe NIRC and other laws, general orspecial; and

(6) Loans to borrowers, whose onlysource of income is compensation and thecorresponding taxes on which has beenwithheld at source: Provided, That theborrowers submitted, in lieu of the ITR, acopy of their Employers Certificate ofCompensation Payment/Tax Withheld (BIRForm 2316) or their payslips for at leastthree (3) months immediately precedingthe date of loan application.

Loans to micro and small enterpriseswhich are not specifically exempted fromthe additional documentary requirementsspecified under the third paragraph of thisSubsection shall be exempted from saidadditional documentary requirement up to31 December 2011.

Consumer loans, with original amountsnot exceeding P2.0 million, are exemptedfrom updating requirements or the requiredannual submission of the samerequirements forwarded during the initialsubmission under this Subsection but notin their restructuring, renewal, or extensionsor availment/re-availment against existingcredit lines: Provided, That these loans aresupported by ITRs or by BIR Form 2316 orpayslips for at least three (3) monthsimmediately preceding the date of loanapplication, and financial statementssubmitted for taxation purposes to the BIR,as may be applicable, at the time the loanswere granted, restructured, renewed, or

extended.For purposes of this Subsection, the

following definitions shall apply:1. Micro and small enterprises shall be

defined as any business activity or enterpriseengaged in industry, agribusiness and/orservices whether single proprietorship,cooperative, partnership or corporationwhose total assets, inclusive of those arisingfrom loans but exclusive of the land onwhich the particular business entitys office,plant and equipment are situated, must havea value of up to P3.0 million and P15.0million, respectively, or as may be definedby the SMED Council or other competentgovernment agency.

2. Consumer loans is defined to includehousing loans, loans for purchase of car,household appliance(s), furniture and fixtures,loans for payment of educational and hospitalbills, salary loans and loans for personalconsumption, including credit card loans.(As amended by Circular Nos. 694 dated 14 October 2010,622 dated 16 September 2008, 607 dated 30 April 2008 and549 dated 09 October 2006)

X304.2 Purpose of loans and othercredit accommodations. Before grantinga loan or other credit accommodation,banks shall ascertain the purpose of the loanor other credit accommodation which shallbe clearly stated in the application and inthe contract between the bank andborrower. The proceeds of a loan or othercredit accommodation shall be utilized onlyfor the purpose(s) stated in the applicationand contract; otherwise, the bank mayterminate the loan or other creditaccommodation and demand immediaterepayment of the obligation.Notwithstanding the preceding sentence,the proceeds of a loan or other creditaccommodation may be utilized by theborrower for a purpose(s) other than thatoriginally stated in the application andcontract: Provided, That such otherpurpose(s) is/are among those for which the

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lending bank may grant loans and othercredit accommodations under existing lawsand regulations: Provided, further, That suchutilization shall be with prior writtenapproval of duly authorized officer(s)/committee/board of directors of the lendingbank and such written approval shall formpart of the contract between the bank andthe borrower.

X304.3 Prohibited use of loanproceeds. Banks are prohibited fromrequiring their borrowers to acquire sharesof stock of the lending bank out of the loanor other credit accommodation proceedsfrom the same bank.

X304.4 Signatories. Banks shallrequire that loans and other creditaccommodations be made under thesignature of the principal borrower and, inthe case of unsecured loans and other creditaccommodations to an individualborrower, at least one (1) co-maker, exceptthat a co-maker is not required when theprincipal borrower has the financialcapacity and a good track record of payinghis obligations.(As amended by Circular No. 622 dated 16 September 2008)

X304.5 - X304.8 (Reserved)

X304.9 Policies on loans to non-immigrants and embassy officials. Banks areallowed to extend peso loans to thefollowing:

a. Non-immigrants holding visas issuedunder Secs. 9(d) and 9(g) of the ImmigrationAct of 1940, Special Investors Resident Visa(SIRV) and visas issued by the PhilippineEconomic Zone Authority: Provided, That suchloans shall be limited to peso consumer loansincluding credit cards, auto loans andappliance loans, but excluding real estate orhousing loans: Provided, further, That thelending bank institutes measures to mitigate

credit risk such as requiring the submission ofa Comfort Letter from the visa holdersemployer, limiting the term of the loan to theperiod of the visas validity, submission of SIRVidentification card, as well as subjecting thevisa holder to the usual credit processes/requirements; and

b. Embassy officials [foreign diplomatsand career consular officials and employeeswho are physically residing in thePhilippines for a term of one (1) year ormore]: Provided, That such loans shall belimited to consumer loans, including creditcards, auto loans, appliance loans and othersthat may henceforth be allowed by theMonetary Board: Provided, further, That thelending bank institutes measures to mitigatecredit risk such as requiring the submissionof a Comfort Letter from the Embassyemploying said officials.(M-2007-021 dated 15 August 2007)

X304.10 Minimum requireddisclosure. Banks shall provide a table ofthe applicable fees, penalties and interestrates on loan transactions, including theperiod covered by and the manner of andreason for the imposition of such penalties,fees and interests; fees and applicableconversion reference rates for third currencytransactions, in plain sight and language, onmaterials for marketing loans, such asbrochures, flyers, primers and advertisingmaterials, on loan application forms, andon billing statements: Provided, That thesedisclosures are in addition to the fulldisclosure of the fees, charges and interestrates in the terms and conditions of the loanagreement: Provided further, That such tableof fees, penalties and interest rates shall beprinted in plain language and in bold blackletters against a light or white background,and using the minimum Arial 12 theme fontand size, or its equivalent in readability, andon the first page, if the applicable documenthas more than one (1) page.

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Transitory provision: Banks shall begiven a period of 120 days from 6 January2011 to fully implement the requireddisclosure requirements.(Circular No. 702 dated 15 December 2010)

X304.11 Unfair collection practicesBanks, collection agencies, counsels andother agents may resort to all reasonable andlegally permissible means to collect amountsdue them under the loan agreement:Provided, That in the exercise of their rightsand performance of duties, they mustobserve good faith and reasonable conductand refrain from engaging in unscrupulousor untoward acts. Without limiting thegeneral application of the foregoing, thefollowing conduct is a violation of thisSubsection:

a. the use or threat of violence or othercriminal means to harm the physical person,reputation, or property of any person;

b. the use of obscenities, insults, orprofane language which amount to acriminal act or offense under applicablelaws;

c. disclosure of the names of borrowerswho allegedly refuse to pay debts, exceptas allowed under Subsec. X304.12;

d. threat to take any action that cannotlegally be taken;

e. communicating or threat tocommunicate to any person creditinformation which is known to be false,including failure to communicate that a debtis being disputed;

f. any false representation or deceptivemeans to collect or attempt to collect anydebt or to obtain information concerning aborrower; and

g. making contact at unreasonable/inconvenient times or hours which shall bedefined as contact before 6:00 A.M. or after10:00 P.M., unless the account is past duefor more than sixty (60) days or the borrowerhas given express permission or said times

are the only reasonable or convenientopportunities for contact.

Banks shall inform their borrowers inwriting of the endorsement of the collectionof their account to a collection agency/agent, or the endorsement of their accountfrom one collection agency/agent to another,at least seven (7) days prior to the actualendorsement. The notification shall includethe full name of the collection agency andits contact details: Provided, That therequired notification in writing shall beincluded in the terms and conditions of theloan agreement. Banks shall adopt policiesand procedures to ensure that personnelhandling the collection of accounts, whetherthese are in-house collectors, or third-partycollection agents, shall disclose his/her fullname/true identity to the borrower.(As amended by Circular No. 702 dated 15 December 2010)

X304.12 Confidentiality ofInformation. Banks shall keep strictlyconfidential the data on the borrower orconsumer, except under the followingcircumstances:

a. disclosure of information is with theconsent of the borrower or consumer;

b. release, submission or exchange ofcustomer information with other financialinstitutions, credit information bureaus,lenders, their subsidiaries and affiliates;

c. upon orders of court of competentjurisdiction or any government office oragency authorized by law, or under suchconditions as may be prescribed by theMonetary Board;

d. disclosure to collection agencies,counsels and other agents of the bank toenforce its rights against the borrower;

e. disclosure to third party serviceproviders solely for the purpose of assistingor rendering services to the bank in theadministration of its lending business; and

f. disclosure to third parties such asinsurance companies, solely for the purpose

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of insuring the bank from borrower defaultor other credit loss, and the borrower fromfraud or unauthorized charges.(Circular No. 702 dated 15 December 2010)

X304.13 - X304.14 (Reserved)

X304.15 Sanctions.Violations of theprovisions of Subsecs. X304.10 to X304.12shall be subject to any or all of the followingsanctions depending upon their severity:

a. First offense. Reprimand for thedirectors/officers responsible for theviolation;

b. Second offense. Disqualification ofthe bank concerned from the credit facilitiesof the BSP except as may be allowed underSection 84 of R. A. No. 7653;

c. Subsequent offense/s:i. Prohibition on the bank concerned

from the extension of additional creditaccommodation against personal security;and

ii. Penalties and sanctions providedunder Sections 36 and 37 of R. A. No. 7653.(Circular No. 702 dated 15 December 2010)

Sec. X305 Interest and Other Charges. Therate of interest, including commissions,premiums, fees and other charges, on anyloan, or forbearance of any money, goodsor credits regardless of maturity and whethersecured or unsecured shall not be subjectto any regulatory ceiling.

X305.1 Rate of interest in the absenceof stipulation. The rate of interest for theloan or forbearance of any money, goodsor credits and the rate allowed in judgments,in the absence of expressed contract as tosuch rate of interest, shall be twelve percent(12%) per annum.

X305.2 Escalation clause; whenallowable. Parties to an agreementpertaining to a loan or forbearance of

money, goods or credits may stipulate thatthe rate of interest agreed upon may beincreased in the event that the applicablemaximum rate of interest is increased by theMonetary Board: Provided, That suchstipulation shall be valid only if there is alsoa stipulation in the agreement that the rateof interest agreed upon shall be reduced inthe event that the applicable maximum rateof interest is reduced by law or by theMonetary Board: Provided, further, That theadjustment in the rate of interest agreed uponshall take effect on or after the effectivity ofthe increase or decrease in the maximumrate of interest.

X305.3 Floating rates of interest. Therate of interest on a floating rate loan duringeach interest period shall be stated on thebasis of Manila Reference Rates (MRRs),T-Bill Rates or other market based referencerates plus a margin as may be agreed uponby the parties.

The MRRs for various interest periods shallbe determined and announced by the BSPevery week and shall be based on the weightedaverage of the interest rates paid during theimmediately preceding week by the ten (10)KBs with the highest combined levels ofoutstanding deposit substitutes and timedeposits, on promissory notes issued and timedeposits received by such banks, of P100,000and over per transaction account, withmaturities corresponding to the interest periodsfor which such MRRs are being determined.Such rates and the composition of the sampleKBs shall be reviewed and determined at thebeginning of every calendar semester on thebasis of the banks combined levels ofoutstanding deposit substitutes and timedeposits as of 31 May or 30 November, asthe case may be.

The rate of interest on floating rateloans existing and outstanding as of23 December 1995 shall continue to be

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determined on the basis of the MRRsobtained in accordance with theprovisions of the rules existing as of 01January 1989: Provided, however, That theparties to such existing floating rate loanagreements are not precluded fromamending or modifying their loanagreements by adopting a floating rate ofinterest determined on the basis of the TBRor other market based reference rates.

Where the loan agreement provides fora floating interest rate, the interest period,which shall be such period of time forwhich the rate of interest is fixed, shall besuch period as may be agreed upon by theparties.

For the purpose of computing theMRRs, banks shall accomplish the reportforms, RS Form 2D and Form 2E (BSP 5-17-34A).

X305.4 Accrual of interest earned onloans. Banks are allowed to accrue interestearned on loans, subject to the followingguidelines and/or procedures.

a. No accrual of interest income isallowed if a loan has become non-performing as defined under Sec. X309.Likewise, interest income shall not beaccrued for unmatured loans/receivableswith indications that collectibility thereofhas become doubtful. These indications shallinclude declaration of bankruptcy,insolvency, cessation of operations, or suchother conditions of financial difficulties orinability to meet financial obligations asthey mature. Separate appropriate recordsshall be maintained for these non-accruingunmatured loans.

Interest income on past due loans arisingfrom discount amortization (and not from thecontractual interest of the accounts) shall beaccrued as provided in PAS 39.

b. Interest earned on extended orrenewed loans may be accrued: Provided,

That there is no previously accrued butuncollected interest thereon.

Interest income on restructured loans(principal plus capitalized interest thereon)may be accrued: Provided, That these are:

(1) In current status; and(2) Fully secured by real estate with loan

value of up to sixty percent (60%) of theappraised value of the real estate securityand the insured improvements thereon, andsuch other first class collaterals as may bedeemed appropriate by the Monetary Board.

c.Interest on non-performing loanaccounts shall be taken up as income onlywhen actual payments thereon are received.

d. Accrued interest earned but not yetcollected/received shall not be consideredas profits and/or earnings eligible fordividend declaration and/or profit sharing.

e. A contra account to be designatedAllowance for Uncollected Interest on Loansshall be set up in accordance with Appendix18 if accrued interest receivable on loansand loan installments is still uncollected afterthree (3) months from the date such loansand loan installments have become non-performing.

f. The amount representing Allowancefor Uncollected Interest on Loans may bechargeable against the excess ofoutstanding valuation reserves for loansand other risk assets as appearing in thebanks books, over those recommendedby the appropriate department of the SES.The balance thereof, if any, shall bechargeable against operations.

g. For all purposes, the Allowance forUncollected Interest on Loans shall beconsidered a valuation reserve/allowanceagainst the Accrued Interest Receivableaccount.

Sec. X306 Past Due Accounts. Past dueaccounts of a bank shall, as a general rule,refer to all accounts in its loan portfolio,

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all receivable components of trading accountsecurities and other receivables, as definedin the Manual of Accounts for Banks, whichare not paid at maturity.1(As amended by M-2010-039 dated 03 November 2010,M-2010-007 dated 23 April 2010, M-2009-040 dated 30 October2009, M-2009- 037 dated 15 October 2009, M 2009-038 dated08 October 2009 and M-2009-036 dated 07 October 2009)

X306.1 Accounts considered past dueThe following shall be considered as pastdue:

a. Loans or receivables payable ondemand - If not paid on the date indicatedon the demand letter, or within three (3)months from date of grant, whichever comesearlier;

b. Bills discounted and time loans,whether or not representing availmentsagainst a credit line - If not paid on therespective maturity dates of the promissorynotes;

c. Customers liability on drafts underletters of credit/trust receipts:

(1) Sight Bills - If dishonored uponpresentment for payment or not paid withinthirty (30) days from date of original entry,whichever comes earlier;

(2) Usance Bills - If dishonored uponpresentment for acceptance or not paid ondue date, whichever comes earlier; and

(3) Trust receipts - If not paid on due date.d. Bills and other negotiable

instruments purchased - If dishonoredupon presentment for acceptance/payment or not paid on maturity date,whichever comes earlier: Provided,however, That an out-of-town check anda foreign check shall be considered as pastdue if outstanding for thirty (30) days andforty-five (45) days, respectively, unlessearlier dishonored;

e. Loans/receivables payable ininstallments - The total outstandingbalance thereof shall be considered pastdue in accordance with the followingschedule:

Minimum No. of Installments

Mode of Payment In Arrears Monthly 3 Quarterly 1 Semestral 1 Annual 1

Provided, however, That when the totalamount of arrearages reaches twenty percent(20%) of the total outstanding balance of theloan/receivable, the total outstandingbalance of the loan/receivable shall beconsidered as past due, regardless of thenumber of installments in arrears: Provided,further, That for modes of payment otherthan those listed above (e.g., daily, weeklyor semi-monthly), the entire outstandingbalance of the loan/receivable shall beconsidered as past due when the totalamount of arrearages reaches ten percent(10%) of the total loan/receivable balance;

For this purpose, the terminstallments shall refer to principaland/or interest amortizations that are dueon several dates as indicated/specified inthe loan documents.

f. Credit card receivables - If theminimum amount due or minimum paymentrequired is not paid within two (2) cycledates, the total amount due stated in themonthly billing statement: Provided,however, That the total outstanding balancewhich includes amortization/s of any fixedmonthly installment plan or deferredpayment scheme shall be considered andreported past due when the number ofmonthly installments in arrears is three (3)or more: Provided, further, That the bankshall have the right to demand the obligationin full in case of default in any installmentthereon if the contract between the bank andthe cardholder contains an accelerationclause; and

g. (Deleted by Circular No. 202 dated27 May 1999)

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h. Microfinance loans - Past Due/Portfolio-at-Risk (PAR) is the outstandingprincipal amount of all loans that have atleast one (1) installment past due for one (1)or more days. The amount includes theunpaid principal balance but excludesaccrued interest. Under PAR, loans areconsidered past due if a payment has fallendue and remained unpaid. Loan paymentsare applied first to any interest due, then toany installment of principal that is due butunpaid, beginning with the earliest suchinstallment. The number of days of lateness/delinquency is based on the due date of theearliest loan installment that has not beenfully paid.

For the purpose of determiningdelinquency in the payment of obligationsas defined in Subsec. X143.1e, any due andunpaid loan installment or portion thereof,from the time the obligor defaults, shall beconsidered past due.(Circular No. 409 dated 14 October 2009, as amended by CircularNo. 607 dated 30 April 2008)

X306.2 Demand loans. Banks shall,in case of non-payment of a demand loan,make a written demand within three (3)months following the grant of such loan. Thedemand shall indicate a period of paymentwhich shall not be later than three (3) monthsfrom date of said demand.

X306.3 Renewals/extensions. No loanshall be renewed or its maturity date ex-tended unless the corresponding accruedinterest receivable shall have been paid.

X306.4 Restructured loansRestructured loans whose terms of paymenthave not been complied with and whichhave become past due shall be governed bythe provisions of Sec. X322.

X306.5 Write-off of loans as bad debtsa. Approval by board of directors

Banks, upon approval by their board ofdirectors may write-off loans, other creditaccommodations, advances, and otherassets, regardless of amount, againstallowance for probable losses (valuationreserves) or current operations as soon asthey are satisfied that such loans, other creditaccommodations, advances and other assetsare worthless as follows:

(1) In the case of secured loans, banksmay write-off loans, other creditaccommodations and other assets in anamount corresponding to the bookedvaluation reserves: Provided, That thebalance of the secured loans, other creditaccommodations, advances and other assetsshall remain in the books.

(2) In the case of unsecured loans, othercredit accommodations, advances

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and other assets, banks shall write-off saidloans, other credit accommodations,advances and other assets in full amountoutstanding.

However, write-off of loans, othercredit accommodations, advances andother assets considered transactions withDOSRI shall be with prior approval of theMonetary Board.

b. Definitions. For purposes of thisSection, the following terms are herebydefined as follows:

(1) Loans. The term loans shall referto all the accounts under the loan portfolioof a bank as enumerated in the Manual ofAccounts for Banks.

(2) Other credit accommodations. Theterm other credit accommodations shallrefer to exposures of banks other than loanssuch as sales contract receivables, accountsreceivables, accrued interest receivables,lease receivables, and rental receivables.

(3) Advances. The term advances shallrefer to any advance by means of anincidental or temporary overdraft, cashvale, any advance by means of DAUDand any advances of unearned salary orunearned compensation.

(4) Other assets. The term other assetsshall refer to investments, placements,ROPAs and all other asset accounts that willnot fall under loans and other creditaccommodations.

(5) Bad debts. The term bad debts shallrefer to the definition under Subsec. X136.1.

c. Reporting requirements. Notice ofwrite-off of loans, other creditaccommodations, advances, and otherassets shall be submitted in the prescribedform to the appropriate department of SESconcerned within thirty (30) days afterevery write-off with (i) a sworn statementsigned by the President of the bank orofficer of equivalent rank that write-off didnot include transactions with DOSRI and(ii) a copy of board resolution approvingthe write-off.

The income tax expense deferredcorresponding to the amount of loan, othercredit accommodation, advances and otherasset written-off considered deductible forincome tax purposes shall be recognizedand reversed in banks books.

d. Verification of write-offs. Write-offsof loans shall be subject to verificationduring examination.

X306.6 Writing-off microfinanceloans as bad debts. Microfinance loans,regardless of amount that have becomepast due in accordance with Subsec.X306.1h may be written-off, in conformitywith the provisions of Subsec. X306.5:Provided, That the notice of write-off andattachments required under Item c ofSubsec. X306.5 are filed within thirty (30)days after every write-off of loans.

X306.7 Updating of informationprovided to credit information bureausBanks which have provided adverseinformation, such as the past due or litigationstatus of loan accounts, to credit informationbureaus, or any organization performingsimilar functions, shall submit monthlyreports to these bureaus or organizations onthe full payment or settlement of thepreviously reported accounts within five (5)banking days from the end of the monthwhen such full payment was received. Forthis purpose, it shall be the responsibility ofthe reporting banks to ensure that theirdisclosure of any information about theirborrowers/clients is with the consent ofborrowers/clients concerned.(Circular No. 589 dated 18 December 2007)

Sec. X307 Truth in Lending ActDisclosure Requirement. Banks arerequired to strictly adhere to the provisionsof R.A. No. 3765, otherwise known as theTruth in Lending Act, and shall make thetrue and effective cost of borrowing anintegral part of every loan contract.

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The following regulations shall applyto all banks engaged in the following typesof credit transactions:

a. Any loan, mortgage, deed of trust,advance and discount;

b. Any conditional sales contract, anycontract to sell, or sale or contract of sale ofproperty or services, either for present orfuture delivery, under which part or all ofthe price is payable subsequent to themaking of such sale or contract;

c. Any rental-purchase contract;d. Any contract or arrangement for the

hire, bailment, or leasing of property;e. Any option, demand, lien, pledge,

or other claim against, or for delivery of,property or money;

f. Any purchase, or other acquisitionof, or any credit upon security of anyobligation or claim arising out of any of theforegoing; and

g. Any transaction or series oftransactions having a similar purpose oreffect.

The following categories of credittransactions are outside the scope of theseregulations:

(1) Credit transactions which do notinvolve the payment of any finance chargeby the debtor; and

(2) Credit transactions in which thedebtor is the one specifying a definite andfixed set of credit terms such as bank deposits,insurance contracts, sale of bonds, etc.

X307.1 Definition of termsa. Person means any individual,

partnership, corporation, association orother organized group of persons, or thelegal successor or representative of theforegoing, and includes the PhilippineGovernment or any agency thereof or anyother government, or any of its politicalsubdivisions, or any agency of theforegoing.

b. Cash price or delivered price, incase of trade transactions, is the amount ofmoney which would constitute full

payment upon delivery of property (exceptmoney) or service purchased at the banksplace of business. In the case of financialtransactions, cash price represents theamount of money received by the debtorupon consummation of the credittransaction, net of finance chargescollected at the time the credit is extended(if any).

c. Down Payment represents theamount paid by the debtor at the time ofthe transaction in partial payment for theproperty or service purchased.

d. Trade-in represents the value of anasset agreed upon by the bank and debtor,given at the time of the transaction in partialpayment for the property or servicepurchased.

e. Non-finance charges correspond tothe amounts advanced by the bank foritems normally associated with theownership of the property or of theavailment of the service purchased whichare not incident to the extension of credit.For example, in the case of the purchaseof an automobile on credit, the creditormay advance the insurance premium aswell as the registration fee for the accountof the debtor.

f. Amounts to be financed consist ofthe cash price plus non-finance charges lessthe amount of the down payment and valueof the trade-in.

g. Finance charge represents theamount to be paid by the debtor incidentto the extension of credit such as interestor discounts, collection fees, creditinvestigation fees, attorneys fees and otherservice charges. The total finance chargerepresents the difference between (a) theaggregate consideration (downpaymentplus installments) on the part of the debtorand (b) the sum of the cash price and non-finance charges.

h. Simple annual rate is the uniformpercentage which represents the ratio, onan annual basis, between the financecharges and the amount to be financed.

X307 - X307.108.12.31


In the case of a single payment uponmaturity, the simple annual rate (R) inpercent is determined by the followingmethod:

(finance charge) 12R= (amount to be X (maturity X 100

financed) period in months)

In the case of the normal installmenttype of credit of at least one (1) year induration, where installment payments ofequal amount are made in regular timeperiods spaced not more than one (1) yearapart, the R in percent is computed by thefollowing method:

(no. of payment (finance charge) in a year)

R=2x x x 100 (amount to be (total no. of

financed) paymentsplus one)

In case where the credit matures in lessthan one (1) year (e.g., installment paymentsare required every month for six (6) months)the same formula will apply except that thenumber of payments in a year would referto the number of installment periods, asdefined in the credit contract if the creditmatures in one (1) year. For example, thenumber of payments a year would be twelve(12) for this purpose in case where six (6)monthly installment payments are called forin the credit transaction.1

X307.2 Information to be disclosedBanks shall furnish each person to whomcredit is extended, prior to theconsummation of the transaction, a clearstatement in writing setting forth thefollowing information:

a. The cash price or delivered priceof the property or service to be acquired;

b. The amounts, if any, to be creditedas downpayment and/or trade-in;

1 This can be determined by dividing twelve, the number of months in a year, by the number or fraction of months betweeninstallment payments.

c. The difference between the amountsset forth under Items a and b;

d. The charges, individually itemized,which are paid or to be paid by such personin connection with the transaction but whichare not incident to the extension of credit;

e. The total amount to be financed;f. The finance charges expressed in

terms of pesos and centavos; andg. The percentage that the finance

charge bears to the total amount to befinanced expressed as a simple annual rateon the outstanding unpaid balance of theobligation.

The contract covering the credittransaction or any other document to beacknowledged and signed by the debtor,shall indicate the above seven (7) items ofinformation. In addition, the contract ordocument shall specify additional charges,if any, which will be collected in casecertain stipulations in the contract are notmet by the debtor.

In case any of the seven (7) items ofinformation mentioned is not disclosed inthe contract covering the credit transaction,all of the seven (7) items, to the extentapplicable, shall be disclosed in anotherdocument in a form (Appendix 19)prescribed by the Monetary Board, to besigned by the debtor and appended to themain contract. A copy of the disclosurestatement shall be furnished the borrower.

X307.3 Inspection of contractscovering credit transactions. Banks shallkeep in their offices or places of businesscopies of contracts which involve theextension of credit by the bank and thepayment of finance charges therefor. Suchcopies shall be available for inspection orexamination by the appropriate departmentof the SES.

X307.4 Posters. Banks shall post inconspicuous places in their principal placeof business and branches, if any, the following:

X307.1 - X307.408.12.31


a. An abstract of the provisions ofR.A. No. 3765 in the form prescribed bythe Monetary Board (Appendix 20) whichshall be reproduced in a format sixty (60)c.m. wide and seventy-five (75) c.m. long;and

b. Information regarding interest andother charges on loans:

(1) Type of loan;(2) Simple annual rate of interest;(3) Manner of interest payment; i.e.

whether collected in advance or otherwise;and

(4) Other fees and charges imposed bythe bank in connection with the loan.

Sec. X308 Amortization on Loans andOther Credit Accommodations. Theamortization schedule of bank loans andother credit accommodations shall beadapted to the nature of the operations tobe financed.

In case of loans and other creditaccommodations with maturities of morethan five (5) years, provisions must bemade for periodic amortization payments,but such payments must be made at leastannually: Provided, however, That whenthe borrowed funds are to be used forpurposes which do not initially producerevenues adequate for regularamortization payments, the bank maypermit the initial amortization payment tobe deferred until such time as saidrevenues are sufficient for such purpose,but in no case shall the initial amortizationdate be later than five (5) years from thedate on which the loan or other creditaccommodation is granted: Provided,further, That in the case of agriculture andfisheries projects with long gestationperiods, the initial amortization paymentmay be deferred for a longer period basedon the economic life of the project asprovided under Section 24 of R.A. No.8435 and implemented under Sec. X349.

Sec. X309 Non-Performing Loans

X309.1 Accounts considered non-performing; definitions

a. Non-performing loans shall, as ageneral rule, refer to loan accounts whoseprincipal and/or interest is unpaid for thirty(30) days or more after due date or after theyhave become past due in accordance withexisting rules and regulations. This shallapply to loans payable in lump sum andloans payable in quarterly, semi-annual orannual installments, in which case, the totaloutstanding balance thereof shall beconsidered non-performing.

b. In the case of loans payable inmonthly installments, the total outstandingbalance thereof shall be considered non-performing when three (3) or moreinstallments are in arrears.

c. In the case of loans payable in daily,weekly or semi-monthly installments, thetotal outstanding balance thereof shall beconsidered non-performing at the same timethat they become past due in accordancewith Sec. X306, i.e., the entire outstandingbalance of the loan/receivable shall beconsidered as past due when the totalamount of arrearages reaches ten percent(10%) of the total loan/receivable balance.

d. Restructured loans shall beconsidered non-performing in accordancewith Subsec. X322.1.

e. All items in litigation as defined inthe Manual of Accounts for Banks shall beconsidered non-performing.

f. In the case of microfinance loans, pastdue/portfolio-at-risk (PAR) accounts asdefined in Subsec. X361.1(b) shall beconsidered NPL.

Only the following accounts arequalified to be excluded from the non-performing classification:

(1) Loans previously classified as Lossby the BSP fully covered by allowance forprobable losses; and

X307.4 - X309.108.12.31


(2) Outstanding credit card receivablesclassified as Loss in the latest BSPexamination plus credit card receivablesclassified as Loss by the bank but not toexceed the total amount classified as Lossin the latest BSP examination: Provided, Thatinformation on the outstanding credit cardreceivables classified as Loss as of thereporting month shall be reported in aseparate item in the Additional Informationof the CSOC. Only banks with no unbookedvaluation reserves and capital adjustments,even if approved for booking on a staggeredbasis, are qualified to exclude loansclassified as Loss by the BSP from the non-performing classification: Provided, Thatinterest on said loans shall not be accruedand that such loans shall also be deductedfrom total loan portfolio for purposes ofcomputation.(As amended by Circular No. 607 dated 30 April 2008)

X309.2 - X309.3 (Reserved)

X309.4 Reporting requirement. Banksshall report the following data, at the endof each month, as additional information(under Item 7) of the monthly CSOC:7. Total Non-Performing Loans

a. Non-performing regular loans xxxb. Non-performing restructured

loans xxx

7a. Loans classified as Loss inthe latest examination by the BSPwhich are fully covered byAllowance for Probable Losses,net of write-offs and recoveries xxx

7b. Outstanding credit cardreceivables classifed as Lossin the latest BSP examination,net of write-offs, recoveriesand collections xxx

7c. Credit card receivablesclassified as Loss by thebank as of this month xxx

Banks which are not qualified underSubsec. X309.1 to exclude loans classifiedas Loss by the BSP from the non-performing classification may opt not to fillup Item 7a of the Additional Informationof the monthly CSOC.

Sec. X310 (Reserved)

B. SECURED LOANS

Sec. X311 Loans Secured by Real EstateMortgages. Loans against real estate securityshall not exceed seventy percent (70%) ofthe appraised value of the respective realestate security plus seventy percent (70%)of the appraised value of insuredimprovements, and such loans shall not bemade unless title to the real estate is in themortgagor.

In the case of UBs/KBs, the loan valuesof real estate given as security for any loangranted shall be reduced from seventypercent (70%) to not more than sixty percent(60%) of the appraised value of the realestate security and the insured improvements,except the following which shall be alloweda maximum value of seventy percent (70%) ofthe appraised value:

a. Any loan not exceeding P3.5 millionto finance the acquisition or improvementof residential units; and

b. Housing loans extended orguaranteed under the governments NationalShelter Program (NSP) such as the ExpandedHousing Loans Program (EHLP) of the HomeDevelopment Mutual Fund (HDMF or Pag-IBIG Fund) and the mortgage and guaranty andcredit insurance program of the HomeInsurance and Guaranty Corporation (HIGC).

X311.1 Loans secured by juniormortgage on real estate. Banks may alsogrant loans on the security of juniormortgages on real estate: Provided, That forsuch loans to be considered as adequatelysecured under Sections 37 and 38 ofR.A. No. 8791, the sum total of the loans to

X309.1 - X311.108.12.31


be granted and the outstanding balanceof the loan granted on the senior mortgageshall not, at any time, exceed the loanvalue of subject real estate security basedon the appraisal of the real estate by thejunior mortgagee.

A certified latest statement of accountshowing the outstanding balance of the loanincluding interest and arrearages, from thesenior mortgagee shall be presented to thebank.

In case several loans are granted on thesecurity of the same property, the totalamount of the loans shall not, at any time,exceed the total loan value of the saidproperty.

X311.2 (Reserved)

1311.2 (Reserved)

2311.2 (Reserved)

3311.2 E l ig ib le rea l es ta tecollaterals on rural/cooperative bankloans. Loans may be granted by RBs/CoopBanks on the security of lands withoutTorrens Title where the owner of privateproperty can show five (5) years or more ofpeaceful, continuous and uninterruptedpossession in the concept of an owner; orof portions of friar land estates or other landsadministered by the Bureau of Lands thatare covered by sales contracts and thepurchasers have paid at least five (5) yearsinstallment thereon, without the necessityof prior approval and consent by theDirector of Lands, or of portions of otherestates under the administration of theDepartment of Agrarian Reform (DAR) orother governmental agency which arelikewise covered by sales contracts and thepurchasers have paid at least five (5) yearsinstallments thereon, without the necessityof prior approval and consent of the DARor corresponding governmental agency; orof homesteads or free patent lands pending

the issuance of titles but already approved,the provisions of any law or regulations tothe contrary notwithstanding: Provided, Thatwhen the corresponding titles are issued,the same shall be delivered to the Registerof Deeds of the province where such landsare situated for the annotation of theencumbrance: Provided, further, That in thecase of lands pending homestead or freepatent titles, copies or notices for thepresentation of the final proof shall also befurnished the creditor RB/Coop Bank and,if the borrower applicants fail to present thefinal proof within thirty (30) days from dateof notice, the creditor RB/Coop Bank maydo so for them at their expense: Provided,furthermore, That the applicant forhomestead or free patent has already madeimprovements on the land and the loanapplied for is to be used for furtherdevelopment of the same or for otherproductive economic activities: Provided,finally, That the appraisal and verificationof the status of a land is a full responsibilityof the RB/Coop Bank and any loan grantedon any land which shall be found later tobe within the forest zones shall be for thesole account of the RB/Coop Bank.

X311.3 Insurance on real estateimprovements. The required insurance onimprovements used as collateral for loanshould be such as shall be sufficient tosecure seventy percent (70%) of theappraised value of such improvements or ifinadequately insured, the loan value shallcorrespond to the extent of insurance takenon such improvements.

X311.4 (Reserved)

1311.4 (Reserved)

2311.4 Foreclosure by thrift banksThe foreclosure of mortgages covering loansgranted by TBs and executions of judgmentthereon involving real properties

X311.1 - 2311.408.12.31


2311.4 - 3311.410.12.31

Part III - Page 23

levied upon by a sheriff shall be exempt fromthe publications in newspapers nowrequired by law where the total amount ofloan, excluding interests due and unpaid,does not exceed P100,000 or such amountas the Monetary Board may prescribe asmay be warranted by prevailing economicconditions and by the nature of service ofcustomers served by each category of theTB. It shall be sufficient publication in suchcases if the notices of foreclosure andexecution of judgment are posted in theconspicuous area of the TBs premises,municipal building, municipal publicmarket, the barangay hall, and the barangaypublic market, if there be any, where theland mortgaged is situated within a periodof sixty (60) days immediately preceding thepublic auction of execution of judgment.Proof of publication as required herein shallbe accomplished by an affidavit of the sheriffor officer conducting the foreclosure saleor execution of judgment and shall beattached with the records of the case.

A TB shall be allowed to foreclose landsmortgaged to it: Provided, That said landsshall be covered under R.A. No. 6657.

3311.4 Foreclosure by rural/cooperative banks. The foreclosure ofmortgages covering loans granted by RBsand executions of judgment thereoninvolving real properties levied upon by asheriff shall be exempt from the publicationsin newspapers now required by law wherethe total amount of loan, excluding interestsdue and unpaid, does not exceed P100,000or such amount as the Monetary Board mayprescribe as may be warranted byprevailing economic conditions. It shall besufficient publication in such cases if thenotices of foreclosure and execution ofjudgment are posted in the conspicuous areaof the municipal building, the municipalpublic market, the barangay hall, and the

barangay public market, if any, where theland mortgaged is situated during the periodof sixty (60) days immediately preceding thepublic auction of execution of judgment.Proof of publication as required herein shallbe accomplished by an affidavit of the sheriffor officer conducting the foreclosure sale orexecution of judgment and shall be attachedwith the records of the case: Provided, Thatwhen a homestead or free patent isforeclosed, the homesteader or free patentholder, as well as his heirs shall have theright to redeem the same within one (1) yearfrom the date of foreclosure in the case ofland not covered by a Torrens Title or one(1) year from the date of the registration ofthe foreclosure in the case of land coveredby a Torrens Title.

In the case of Coop Banks theforeclosure of mortgages and execution ofjudgment thereon involving real propertieslevied upon by a sheriff shall be exemptfrom the publications in newspaper nowrequired by law where the total amountof loan, excluding interests due andunpaid, does not exceed P250,000 orsuch amount as the BSP may prescribe asmay be warranted by prevailing economicconditions and by the nature and characterof the Coop Banks. It shall be sufficientpublication in such cases if the notices offoreclosure and execution of judgment areposted in conspicuous areas in the bankspremises, municipal hall, the municipalpublic market, the barangay hall and thebarangay public market, if any, where theproperty mortgaged is situated during theperiod of sixty (60) days immediatelypreceding the public auction or executionof judgment. Proof of publication as requiredherein shall be accomplished by an affidavitof the sheriff or officer conducting theforeclosure sale or ex

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