General Governance Principles and Standards on Relationships Between Banks and Their Related Non-Governmental Organizations (NGOs)/Foundations

t v- .\v \ ,i}7-\\-_ \ {ijf1] ) enr.roxo sENTRAL No PrLrPrNAs \!-\ttt OFFICE OF THE DEPUTY GOVERNOR SUPERVISION AND EXAMINATION SECTOR MEMORANDUM NO. M-2011- 033 To : ALL BANKS ENGAGED lN RETAII MICROFINANCE OPERATIONS Subject : General Governance Principles and Standards On Relationships Between Ba nks and Their Related Non-Governmenta I Orga nizations (NGOs)/Foundations The Monetary Board in its Resolution No. 790 dated 25 May 2011 approved the issuance of general principles and standards that will govern the business relationships between banks and their related NG0sfoundations engaged in retail microfinance. Section 1. General Principles and Standards To reinforce the observance of corporate governance principles and guidelines, the following principles and standards shall govern business relationships between banks and their related NGOsfoundations engaged in retail microfi nance operations: General Principles 1. Microfinance programs/operations of banks shall be supervised and administered separately from the microfi nance programs/operations of related NGOs/foundations; 2. All transactions between banks and their related NGOsfoundations shall be in the ordinary course of business and upon terms not less favorable to the bank than those offered to other parties; and 3. Bank board of directors and management must at all times adhere to the three pillars of corporate governance, namely: fairness, accountability and transparency in al.l of its dealings with related NGOsfoundations. Standards 1. Microfinance programs/operations of banks and their related NGOsfoundations should have separate organizational strusture, manual of operations, management information systems, etc.; A, Mabini St., Malate 1004 Manila, Philippines O Trunkllne (532) 524-7G11 o URl:www.bsp.gov.ph o e-mail: bspmail@bsp,gov.ph

2. The board of directors should formulate policies that shall govern the dealings of the bank with its related NGOfoundation, e.g. prohibiting and/or limiting activities and transactions that could result in conflict of interests and providing preferential treatment to the related NGOfoundation to the disadvantage of the bank. Also, the board must ensure that senior management implements the aforementioned policies by requiring the submission of periodic reports covering transactions with related NGOfoundation; 3. Formal agreements/contracts should govern the business relationships of banks and their related NG0sfoundations covering both their overall/general relationship and specific transactions such as: (i) the purchase by bank of NGOfoundation's loan portfolio, (iii) the collection of loan payments (from NGOfoundation's borrowers) by the bank and (iv) the payment for trainings/seminars given by the NGOfoundation; Terms and conditions of the formal agreements/contracts shall include, among other things, the following: Purchase of loan receivables of NGo/foundation a. Criteria in selecting loan accounts; b. Purchase price including premiums, if any; c. Bank recourse in case of non-payment by borrowers; Collection of loan pavments from borrowers of NG0lfgundation a. Compensation for utilizing bank resourcet e.g. employees, transportation and equipment, etc.; b. Mode of payment by the NGOfoundation; Conduct of microfinance traininss/seminars bv NGO/foundation a. Lecturers shall have adequate background andlor experience in microfi nance operations; b. Training syllabus which include subjects on client selection, credit and cash flows analyses, delinquency management, etc. Any loan, other credit accommodation or guarantee in any form whatsoever granted to a related NGOfoundation is subject to existing rules on DOSRI loans. However such loan, other credit accommodation or guarantee shall be excluded in determining compliance with the Individual Ceiling on DOSRI loans; provided that such loan, other credit accommodation or Page Zof 4

guarantee is secured by the deposits of clients of the borrowing NGOffoundation which are maintained with the lending bank; provided further that all of the following conditions are met: a. Existing regulations on the opening of deposit accounts and other deposit transactions shall apply except when specifically stated otherwise; b. Depositors shall issue waivers of confidentiality of their deposits and enter hold-out agreements with the lending bank; c. Interest rates on such deposits shall not exceed to that of similar type of deposit accounts; d. Collected but undeposited capital build-up funds from clients shall be recorded in a temporary liability account in the books of related NGOsfoundations and shall be deposited with the related bank not later than fifteen (151 calendar days from date of collection; e. Total loans, other credit accommodations and guarantees granted to the related NGOfoundation shall not exceed, at any time, the total deposits owned by its clients; and f. That the NGOfoundation shall consider as payments to the clients' obligations any deposits used by the lending bank to settle any unpaid obligation{s} of the NGOfoundation. 5. Bank directors and management are reminded to perform their duties and responsibilities in accordance with the standards of corporate governance. Under subsection XL4L.3, MORB, duties and responsibilities of bank directors include, among othert the following: a. To conduct fair business transactions with the bank; b. To act honestly and in good faith, with loyalty and in the best interest of the institution; c. To devote time and attention necessary to properly discharge their d uties and responsibilities; d. To act judiciously; and e. To observe confidentiality. Section 2. Requirements In this connection, banks engaged in retail microfinance operations are required to: 1. To include in the biographical data of directors and officers their involvement, in any capacity, in the microfinance operations of related m icrofinance NGOs/foundations; Page 3 of4

2. Require the approval of the board of directors of all related party transactions and that same be covered by notarized agreements. lt is also understood that all loan transactions with related NGosffoundations shall comply with the existing requirements on DOSRI loans; and 3. Submit a copy of the said agreement/contract to the appropriate BSP department/group for review and evaluation. For information and guidance. '*fi.8m; [( June 2011