BSP Issuances

10 November 2011

Circular No. Date Subject

723 739

05.26.11 10.26.11

Outsourcing of Automated Teller Machine (ATM) Servicing for Offsite

and Onsite ATMs

725 06.16.11Relationships Between Banks and

Their Related Microfinance NGOs/Foundation

727 06.23.11 Amendment - Branching

734 08.16.11Amendment – Single Borrower’s

Limit (SBL)

Revisit:

• Importance of Capital Adequacy Ratio

• Electronic submission (Memorandum No. M-2011-052 dtd. 6 October 2011)

• Allowance for Probable Losses

Outsourcing of Automated Teller Machine (ATM)

Servicing for Offsite / Onsite ATMs

Circular Nos. 723 / 73926 May 2011 / 26 October 2011

• Subject to PRIOR approval of the Monetary Board, Bank may outsource:

ATM servicing for ATMs

a. Cash Replenishment;

b. First Line Maintenance;

c. ATM Online Availability Monitoring; and

d. Cash Forecasting

Outsourcing - ATM

• Troubleshooting

• Replenishment of supplies(e.g. paper and toner)

• Assessment if second line maintenance is necessary

First Line Maintenance

The Bank shall ensure that –

• service provider is registered with DOLE;

• service provider shall strictly observe the confidentiality of banking information;

• service provider shall have no access on depositor’s data pursuant to RA 1405

Conditions:

• outsourcing will not diminish the supervisory and examination authority of the BSP, nor impede exercise thereof;

• bank shall remain responsible for the performance of the outsourced activities shall continue to comply with all the laws

and regulations covering the activities performed by the service provider

Conditions (cont.) :

• manage, monitor and review on ongoing basis the performance of the service provider;

• Amend Business Continuity Plan, if applicable

• inform BSP should the service provider enter into any sub-contracting agreement

Conditions (cont.) :

• Adopt minimum security measures including but not limited to:

Conditions (for Onsite ATMS) :

• Servicing of ATMs shall be limited during business hours

• Service providers will be given limited access to the bank premises

• ATM service area shall be equipped with CCTV system

Relationships Between Banks and their Related

Microfinance NGOs/ Foundations

Circular No. 72516 June 2011

Definition of RI to include:

“Non-governmental organizations (NGOs)/ foundations that are engaged in retail microfinance operations which are incorporated by any of the stockholders and/or directors and/or officers of related banks.”

Related Interest (RI):

• Business relationships between banks and their related MF NGOs/foundation shall be covered by –

Notarized contracts / agreements• nature of transactions• terms and conditions

Additional Report:

Notarized Contracts / Agreements:

Submission 15 banking days from date of meeting of the BOD

approving the said contracts/agreement

Type of Report A-3

Effectivity Starting reporting period ending 30 September 2011

Interlocking Officerships:

General Rule:

There shall be no concurrent officerships, including secondments –

•Between banks•Between a bank, a QB or NBFI

Interlocking Officerships:In case of MF NGOs/Foundations:

Bank officers are prohibited from holding officership or otherwise that may cause them to be involved in the daily microfinance operations of the related NGOs/foundation.

Transitory Provision:

Up to 30 September 2011 to relinquish such officership

Individual Ceiling:The total outstanding loans, other credit accommodations and guarantees to each of the bank’s DOSRI shall be limited to an amount equivalent to -

• Their respective unencumbered deposits; and

• Book value of their paid-in capital contribution in the bank

Individual Ceiling:

• Each DOSRI account has its own individual ceiling, which is distinct from the others comprising the DOSRI group–

• A DOSRI person/entity cannot therefore avail of the individual ceiling of the other DOSRI personalities/entities.

Individual Ceiling:

• Thus, where an RI has no paid-in capital contribution or unencumbered deposit in the lending bank upon which may based the amount which it can borrow, no loan or credit accommodation can be extended to said RI.

Exclusion from Individual Ceiling:Loans, other credit accommodations and guarantees secured by -

Deposits of clients of related MF NGOs/ foundation• Maintained with the related lending bank• Held in the Philippines• Subject to conditions

Conditions for the Exclusion :ALL of the following conditions shall be met:

• Existing regulations on opening of deposit accounts/other deposit transactions shall apply

• Depositors shall issue waiver of confidentiality of their deposits or enter hold-out agreements

• Interest rates on such deposits shall not be more than those of similar type

Conditions for the Exclusion (cont.):• Collected but undeposited capital build-up funds

from clients

• recorded in temporary liability accounts in the books of related NGOs/foundation

• Deposited with the related bank not later than 15 calendar days from collection

Conditions for the Exclusion (cont.):

• Total loans granted to related NGO/foundation shall not exceed to total deposits owned by its clients

• NGO/foundation shall consider as payment to clients’ obligations any deposit used by the lending bank to settle any unpaid obligation(s) of the NGO/foundation

Amendments to the Guidelines on Branching

Circular No. 72723 June 2011

Branching Guidelines:

• RB shall only be allowed to establish branches if

Combine capital account

At least P10 million

Branching Guidelines:

• branches in cities/ municipalities of higher classification and with corresponding higher capitalization requirements, except in Metro Manila

subject to conditions

Combine capital account

At least P10 million

Branching Guidelines:

Provided - Where majority of total assets and/or majority

of the of its total deposit liabilities are regularly accounted for by the branches located in such cities/municipalities of higher classification

RB shall comply with minimum capital for city/municipality with highest classification within 1 year from BSP finding

Branching Guidelines:

Bank Category Required Minimum Capitalization

RBs with Head Office

(1) Metro Manila 100 million

(2) Cities of Cebu and Davao 50 million

(3) All other cities 25 million

(4) 1st to 4th class municipalities 10 million

(5) 5th to 6th class municipalities 5 million

Branching Guidelines:

• Anywhere within 2-hour normal travel by land/sea public transport from the head office, except in Metro Manila

Combine capital account

At least P10 million but less than P50 million

Branching Guidelines:

• In any island group (Luzon, Visayas or Mindanao) where the head office is located, except in Metro Manila

Combine capital account

At least P50 million but less than P100 million

Branching Guidelines:

• Anywhere in the Philippines, except in Metro Manila

Combine capital account

At least P100 million

Restriction:

RBs are not allowed to establish branches in Metro Manila

Restricted Areas:Cities of -

•Makati•Mandaluyong•Manila•Parañaque•Pasay•Pasig•Quezon•San Juan

Exemptions 1 & 2:

• Microfinance-oriented RB may be allowed to establish branches in Metro Manila, including in the restricted areas

• RB may be allowed to establish MF-oriented branches in Metro Manila, including in the restricted areas

Combine capital account

At least P100 million

Exemption 3 :

• RB with head office outside restricted area but within Metro Manila

Allowed to establish 1 branch anywhere in restricted areas if it has no existing branch in said areas

Combine capital account

At least P1.5 billion

Exemption 4 :

• RB with head office outside Metro Manila

Allowed to establish 1 branch anywhere in Metro Manila, including in the restricted areas if it has no existing branch in Metro Manila

Combine capital account

At least P1.5 billion

Amendments to Regulations on Single Borrower’s Limit

Circular No. 73416 August 2011

SBL:Coverage –

Loans and other credit accommodations as well as deposits and usual guarantees by a bank to any other bank, whether locally or abroad

Limit –25% of the net worth of

the lending bank or P100 million, whichever is higher

Condition:Lending Bank –

• Exercise proper due diligence in selecting a depository bank

• Formulate appropriate policies to address the corresponding risks involved in the transactions.

Exemption:

• Deposits of RBs with government-owned or controlled institutions (DBP, LBP)

• Deposits of RBs in private banks in municipalities and cities where there are no government banks

Exemption (cont.):• For RBs with authority to accept/create

demand or current deposits-

Demand deposit account in a private depository bank being used to fund checks cleared through said private depository bank

Electronic Submission of the Original and the Revised Risk-Based

Capital Adequacy (CAR) Reports

Memorandum No. M-2011-0546 October 2011

REMINDER:Submission of the ORIGINAL and the REVISED Risk-

Based Capital Adequacy Ratio (CAR) Reports30 Sept 2011 31 Dec 2011 2012 onwards

Hard Copy

Original

Revised

Electronic Copy

Original

Summary Sheet

Revised

Electronic Submission• Downloadable from BSP website

http://www.bsp.gov.ph/frp/templates

Summary Sheet of Original CAR Report Data Entry Template of Revised Risk Based

CAR Report

Electronic Submission• Deadline

Solo Basis 15 banking days after end of reference quarter

Consolidated Basis 30 banking days after the end of reference quarter

Other Documents for Submission• Electronically transmit the scanned Control

Prooflist (CP) of the Revised CAR report

• Duly signed by the authorized official• File format – portable document format (pdf)• Filename to be used – Prooflist-CAR.pdf• BSP/SDC E-mail addresses• Scanning not available; via facsimile

• Director of SDC at (632) 708-7554 or 708-7558

Other Submission Guidelines

• Summary of Documents to be e-mailed

• Summary Sheet of Orig CAR report• Revised Risk Based CAR Report• Scanned CP in pdf

E-mail Address• sdcrb-car@bsp.gov.ph

• Required format for subject:

“CAR<bankname>,”reference period”, e.g.,:

To : sdcrb-car@bsp.gov.phcc :Subject : CAR <bankname>, 30 September 2011

Other Submission Guidelines• Unable to electronically submit:

• Summary Sheet of Orig CAR report• Revised Risk Based CAR Report• Scanned CP in pdf

Through messengerial or postal services

CD

The DirectorSupervisory Data Center (SDC)Bangko Sentral ng Pilipinas16th Floor Multi-Storey BuildingBSP Complex, A. Mabini StreetMalate, Manila 1004

Late and/or Erroneous Reporting• Revised Risk Based CAR report

• Penalties under Subsection X192.2 of the MORB• Category A-2 (P180/day)• Starting reporting period ending 31 March 2012

• Same penalties shall continue to apply for the late and/or erroneous reporting of the original CAR report until said reportorial requirement is discontinued.

Details of the Guidelines

Memorandum No. M-2011-054dated 6 October 2011

CAPITAL ADEQUACY RATIO (CAR):

A Different Perspective

Capital Adequacy Ratio (CAR)Compliance Report

Decision Making Tool

CAR FORMULA

CAPITAL

RISK

Capital Adequacy Ratio (CAR)• A measure of the amount of bank’s capital as

a percentage of its risk weighted exposure

• Use to watch bank’s health

• Determines the capacity of a bank in terms of meeting the liabilities and risks (credit, market, operational)

Traditional vs. Risk-Based Supervision

The new approach - allows banks to take risks so long as the banks demonstrate the ability to manage and price for those risks.

Traditional bank supervision tended to instruct banks to avoid risks that seem too high.

BANKING : The Challenge

• Banking is a business. It needs to make money to stay viable.

• But banks, like any business, cannot make enough money without taking on risks.

• Risk-taking, which lead to bank failure, is therefore an essential part of the game.

• Risks in banking are to be managed but not entirely eliminated.

Role of Capital

• Capital serves as financial buffer to enable a bank to ride out losses.

• Makes owners to pay attention to the business.

• The riskier the bank, the more capital should be held.

• But since capital is costly, bank may choose a level of capital not commensurate to their risk profile.

Role of Capital

• Minimum capital level requirement is not enough.

• CAR regulation particularly addresses this prudential concern

Importance of CAR in Risk-based Supervision

• CAR is a very good indicator of bank’s financial strength.

• CAR is a sound basis for early supervisory intervention which is important in crisis prevention.

• CAR can be a fair and transparent criterion for granting authorities.

How Much Capital?

CAPITAL RISK

Banks should have capital appropriate for their risk taking activities

Capital is not the answer to everything!

Banks need to improve their risk management practices and risk assessment capabilities – and this implies continued improvement in corporate governance

Loan Portfolio and Other Risk Assets Review System

REVISITED

Importance of Loan and ORA Review System

• To ensure that timely and adequate management action is taken to maintain the quality of the loan portfolio and ORA

• Adequate loss reserves are set up and maintained at a level sufficient to absorb the loss inherent in the loan portfolio and ORA

Importance of Loss Reserve

• Management must recognize that loss reserve is a stabilizing factor

• Failure to account appropriately for losses or make adequate provisions for estimated future losses may result in misrepresentation of the bank’s financial condition.

Common Observations:1. Bank waits for BSP Examiners to Compute

the Allowance for Probable Losses

• BOD is responsible for ensuring that banks have controls in place to determine the allowance for probable losses

• BSP examiners’ role is to evaluate the adequacy and effectiveness of the credit review

Common Observations:Results:

• Large amount of required allowance after BSP examination that significant affects bank’s profitability and capital

• BSP examiners’ computed amount (based on sample) may not reflect the adequate allowance needed to protect the bank from probable losses

Common Observations:2. In addressing the BSP directive, the bank

tends to:

• Book the required amount and waits for the next examination;

• Focus on collecting BSP classified accounts to justify that booking of additional allowance is no longer necessary

Common Observations:Results:

• Booked allowance for probable losses is still insufficient in the subsequent BSP exams

• Bank is being subject to sanctions• Denial of request for authority to establish

new banking offices• Denial of access to BSP credit facilities• Fine of P500 per day

Reminder:1. The computed allowance for probable

losses during examination covers losses that are probable and estimable on the date of evaluation.

2. To establish an adequate allowance, a bank must be able to recognize when loans have become a problem (accurate and timely manner).

Reminder:3. To be effective, a loan review system must

respond not only to obvious indicators of a problem, such as delinquency.

4. It must also recognize more subtle warnings of conditions that may affect the ability of borrowers to repay on a timely basis.

Reminder:Allowance for probable losses is not a static figure. Adjustment of the booked amount must not only consider previously classified accounts that had been collected but must also take into consideration the subsequently identified problem accounts. Banks must have an effective loan review system that will ensure the adequacy of the allowance at all times.

Thank You