January 9, 2005
HON. NESTOR ESPENILLA
BANGKO SENTRAL NG PILIPINAS
Dear Deputy Governor Espenilla,
Thank you for giving us the opportunity to contribute in the crafting of the proposed BSP Circular on Joint Venture Agreement of Banks with Real Estate
As we have articulated during the consultative meeting held last Wednesday, January 4, 2006 at the BSP, we welcome this development as beneficial to the operation of rural banks specially as it pertains to realizing economic gains from their non-performing assets. That real estate in the ROPOAs of rural banks are generally small in size makes them suitable for joint venture (JV) possibilities with real estate developers more likely in the area of subdivision development for low-cost housing purposes. It was in this context that we suggested the possibility of establishing a performance threshold for installment sales of subdivided real estate that is subject of a JV with real estate developer. Such that once the amount of the installment sales equals the book value of the asset in the ROPOA of rural banks in a JV arrangement, the said asset will be reclassified as part of the loan portfolio of the bank with a corresponding reduction in the provisioning for risk. While ROPOAs are commonly reduced through outright sale, this model will afford a leeway for rural banks to achieve the same result with the
installment sale of land that is the subject to a JV with a real estate developer.
We subscribe to the proposition of majority of the representatives from the banking sector that the Monetary Board broadens or, more aptly, reclassify real estate development from “non-allied” to “allied” undertaking of banks to encourage banks to pursue this initiative that can potentially reduce the backlog of housing requirement in the National Shelter Program of the government. This program, which has the support of the
BSP, will have a direct impact in national development.
Finally, while it may be prudent for all JVs covered by this circular to seek the approval of the Monetary Board, market exigency and processing expediency suggest otherwise. Thus instead we are proposing a certification procedure by which an asset in
the bank’s ROPOA that is subject of a JV can be reclassified/ booked into another entry.
We hope our suggestions will redound to the overall benefit of the Philippine banking system.
Very truly yours,
GEN. WILLIAM K. HOTCHKISS III, AFP (RET)