Amendments to the Manual of Regulations for Banks re risk weight applicable to small and medium enterprises and microfinance loan portfolios that meet prudential standards

CIRCULAR NO. 364 Series of 2003

Pursuant to Monetary Board Resolution Nos. 1700 and 1769 dated November 21, 2002 and December 5, 2002, respectively, approving the amendment to Circular No. 280 dated 29 March 2001, so as to reduce to seventy-five percent (75%) the risk weight applicable to small and medium enterprises (SMEs) and microfinance loan portfolios that meet prudential standards, the provisions of the Manual of Regulations for Banks are hereby amended as follows:

1.  A new provision on on-balance sheet assets that shall be 75% risk -weighted is hereby inserted before the “100% risks weight –“ portion of Subsection X116.2.a of the Manual, as follows:

75 % risk weight –

(1)  Defined small and medium enterprise (SME) and microfinance loan portfolio that meets the following criteria:

For individual claims that may form part of the SME and microfinance loan portfolio-

i.    Claim must be on a small or medium business enterprise as defined under existing BSP regulations; and

ii.   Claims must be in the form of:

Direct loans; or

Unavailed portion of committed credit lines and other business facilities such as outstanding guarantees issued and unused letters of credit, provided that the credit equivalent amounts thereof shall be determined in accordance with Subsection X116.2.b of the Manual of Regulations for Banks.

For the SME and microfinance loan portfolio -

i.    It must be a highly diversified portfolio, i.e., it has at least 500 borrowers that are distributed over a number of industries; and

ii.   The past due ratios of the defined SME and microfinance loan portfolio for each of the immediately preceding three (3) years do not exceed 5%.

For the bank -

i.    It must have adequate risk management process approved by the Board of Directors, including as a minimum, a rigorous credit approval process and an adequate loan tracking system that allows timely monitoring of loan releases, collection and arrearages, and any restructuring and refinancing; and

ii.   The bank must be financially sound and in compliance with major prudential requirements, particularly the following –

CAMELS composite rating of at least “3” and management score of at least “3” in its latest BSP examination; and

Minimum applicable capital adequacy ratio.

2. The revised prescribed report forms on the Computation of Risk-Based Capital Adequacy Ratio Covering Credit Risks incorporating the amendments to Circular No. 280 are attached as Annex “A” (for universal banks, commercial banks and thrift banks) and Annex “B” (for rural banks and cooperative banks).

This Circular shall take effect immediately.

FOR THE MONETARY BOARD:

RAFAEL B. BUENAVENTURA Governor