Circular Date Subject No. Outsourcing of Automated Teller 723 05.26.11 739 10.26.11 Machine (ATM) Servicing for Offsite and Onsite ATMs Relationships Between Banks and 725 06.16.11 Their Related Microfinance NGOs/Foundation 727 06.23.11 Amendment - Branching 734 08.16.11 Amendment – 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 - ATM • 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
First Line Maintenance • Troubleshooting • Replenishment of supplies (e.g. paper and toner) • Assessment if second line maintenance is necessary
Conditions: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 (cont.) : • 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 (for Onsite ATMS) : • Adopt minimum security measures including but not limited to: • 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
Related Interest (RI): 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.”
Additional Report: • Business relationships between banks and their related MF NGOs/foundation shall be covered by – Notarized contracts / agreements • nature of transactions • terms and conditions
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
Branching Guidelines: • RB shall only be allowed to establish branches if Combine capital At least P10 million account
Branching Guidelines: Combine capital At least P10 million account • branches in cities/ municipalities of higher classification and with corresponding higher capitalization requirements, except in Metro Manila subject to conditions
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: Required Minimum Bank Category 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: Combine capital At least P10 million but account less than P50 million • Anywhere within 2-hour normal travel by land/sea public transport from the head office, except in Metro Manila
Branching Guidelines: Combine capital At least P50 million but account less than P100 million • In any island group (Luzon, Visayas or Mindanao) where the head office is located, except in Metro Manila
Branching Guidelines: Combine capital At least P100 million account • Anywhere in the Philippines, except in Metro Manila
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: Combine capital At least P100 million account • 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
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 At least P1.5 billion account
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 At least P1.5 billion account
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
REMINDER:Submission of the ORIGINAL and the REVISED Risk- Based Capital Adequacy Ratio (CAR) Reports 30 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 • email@example.com • Required format for subject: “CAR<bankname>,”reference period”, e.g.,: To : firstname.lastname@example.org cc : Subject : CAR <bankname>, 30 September 2011
Other Submission Guidelines • Unable to electronically submit: • Summary Sheet of Orig CAR report • Revised Risk Based CAR Report CD • Scanned CP in pdf Through messengerial or postal services The Director Supervisory Data Center (SDC) Bangko Sentral ng Pilipinas 16th Floor Multi-Storey Building BSP Complex, A. Mabini Street Malate, 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-2011-054 dated 6 October 2011
Capital Adequacy Ratio (CAR) Compliance Report Decision Making Tool
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 Traditional bank supervision tended to instruct banks to avoid risks that seem too high. The new approach - allows banks to take risks so long as the banks demonstrate the ability to manage and price for those risks.
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? 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
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.