Limits on Borrowings of Local Government Units (LGUs)

Bangko Sentral Ng PiLiPinaS

OFFICE OF THE DEPUTY GOVERNOR SUPERVISION AND EXAMINATION SECTOR

CIRCULAR LETTER NO.CL-2012 - 030

TO ALL BANKS

Subject: :Limits on Borrowings of Local Government Units (LGUs

Iocal government units (LGU). No. 7.A dated 5 January 2012, all Banks are directed to adopt and adhere to the policy limits set by the Department of Finance (DOF) through the Bureau of Loca! Government Finance (BLGF) in granting loans and credit accommodations to the Pursuant to the instruction of the Monetary Board (MB), in its Resolution

BLGF in the issuance of the Certificate of Net Service Ceiling and Borrowing Capacity. Officer-In-Charge and Executive Director of BLGF on the policy action used by Quoted hereunder is an excerpt from the 7 February 2012 letter of

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Section 324 of the Local Government Code (LGC). Although the LGC did not provide a limit as to amount an LGU can borrow, the maximum debt service estimated annual income from regular sources plus IRA, for the current year as allocation in the local budget is pegged at 20% of regular income. In no case, shall both the existing and proposed loan amortization exceed 20% of the current estimated by the DBM. Currently, BLGF is guided by the statutory provisions specifically

.and based on the formula presented below: Capacity pursuant to Local Finance Circular No. 1-2000 dated January 19, 2000 This Bureau issues Certificate of Net Service Ceiling and Borrowing

Computation for Debt Service and Borrowing Capacity

appropriate in the annual budget for the payment of statutory and Debt service ceiling (DSC) is the maximum amount that an LGU can contractual obligations computed as follows:

including (principal, interest) amortizations, sinking fund, etc. DSC = 20% x Annual Regular Income (ARI) Net Dsc = DSc -- all loans which 'are payable during the year,

Note: Annual Regular Income (ARI) includes:

Real property taxes

Internal Revenue Allotment (IRA) Share in exploitation of national wealth when recurring Fees and other charges Income from economic enterprises Business taxes

On the other hand, borrowing Capacity (BC) is the maximum amount of of one or more years at a specified rate of interest computed as follows: statutory and contractual obligations that an LGU may incur over a period

BC = Net DSC x Net Present Value (NPV)

LGU borrowings. It may be more feasible for the GFIs, domestic private banks taking into consideration their paying capacities and the viability of projects to be funded from the proceeds of the loan. and other lending institutions to exercise prudence in the grant of loan to LGU Given this limitation, the BLGF has no legal authority to impose a cap on

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(Sgd.) SALVADOR M. DEL CASTILLO

OlC-Executive Director"

Service Ceiling and Borrowing Capacity issued by the BLGF from a LGU-borrower as part of its due diligence. Thus, all banks should require the submission of the Certificate of Net

. For guidance and strict implementation.

NESTOR A. SPENIL

Deputy Governor

pril 2012

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