BSP Clarifies Exclusions From Real Estate Loan Limit And Stress Test

• Published date: 05 June 2023
• Subject Matter: Real Estate and Construction, Construction & Planning, Real Estate
• Law Firm: SyCip Salazar Hernandez & Gatmaitan
• Author: -1 SyCip Salazar Hernandez & Gatmaitan

On 28 April 2023, the Bangko Sentral ng Pilipinas ("BSP") issued Memorandum No. M-2022-039 and clarified the definition of infrastructure projects for public use as indicated in Section 363-A of the Manual of Regulations for Banks ("MORB") on Limits on Real Estate Exposures of Universal and Commercial Banks.

1. What are the Real Estate Loan Limit and the Real Estate Stress Test?

Under Section 363-A(a) of the BSP's Manual of Regulations for Banks (the "MORB"), the "real estate loans" of a universal bank or commercial bank must not exceed twenty-five percent (25%) of its total loan portfolio, net of interbank loans.

Under Section 363-A(b) of the MORB, the "real estate exposure" of a universal bank or commercial bank must not exceed certain percentages of its capital. Currently, the thresholds are six percent (6%) of a universal bank or commercial bank's Common Equity Tier I capital ratio and ten percent (10%) of its risk-based capital adequacy ratio, on a solo and consolidated basis (after assuming that twenty-five percent (25%) of the bank's real estate exposure is written off).

2. What are considered "real estate loans"?

For purposes of determining compliance with the real estate loan limit, the term "real estate loans" (or "RELs") refers to loans granted to land developers, construction companies or other borrowers for the acquisition and development of land and/or construction of buildings and structures, including housing units for sale/lease and/or for use in retail/wholesale, manufacturing or other income-generating purposes, including loans for the land development and construction of residential properties. Purchases by banks of receivables under contracts to sell executed between the real estate developers and home buyers on a with recourse basis shall be considered loans to real estate developers and shall be classified as commercial RELs.

Technically, the MORB also classifies "loans extended to individual households for purposes of financing the acquisition, construction, and/or improvement of housing units and acquisition of any associated land that is or will be occupied by the borrower, regardless of amount" as RELs, but these are expressly excluded for purposes of determining compliance with the twenty-five percent (25%) limit. The following are also excluded in reckoning compliance with the REL limit:

1. loans extended to land developers/construction companies for the purpose of development and/or construction of socialized and low-cost...