BSP guidelines put teeth into Agri-Agra law

But bank officials claim mandated lending may be bad for business

By: Michelle V. Remo

Monday, September 5th, 2011

The Bangko Sentral ng Pilipinas has issued the necessary guidelines to implement the new and stricter Agri-Agra law amid protests from the country’s banking sector.

The law’s amended version, Republic Act No. 10000, calls for stricter implementation of the provisions of the law that is meant to boost the country’s agriculture sector by requiring banks to lend more.

The law essentially requires banks to allocate 25 percent of their loanable funds for lending to the agriculture sector, unlike the old version where banks were given more leeway to comply with the law, such as lending to the housing and education sectors.

With RA 10000, banks will no longer be considered compliant when they lend to housing and education sectors.

Under the implementing guidelines, embodied in the central bank’s Circular No. 736, the forms by which banks may be deemed compliant with the law have been outlined.

The list includes investments in bonds issued by state-owned institutions, such as Land Bank of the Philippines and Development Bank of the Philippines, or those that have been accredited by the Department of Agriculture. Proceeds of the bonds must be used to fund agricultural projects.

Also, paid subscriptions to shares of stocks of the following organizations will be recognized as an alternative form of compliance to the Agri-Agra law: Quedan and Rural Credit Guarantee Corp., Philippine Crop Insurance Corp., and other government-accredited rural financial institutions.

Lending to the National Food Authority, as well as investments in special deposit accounts (SDA) instruments offered by other banks, will be considered as alternative forms of compliance, provided that the proceeds are channeled to agricultural activities.

Wholesale lending to financial institutions that will use borrowed funds for agricultural projects complete the list of alternative forms of compliance.

The BSP circular also details the computation of “loanable funds” on which the 25-percent required lending to the agriculture sector will be based.

According to the circular, loanable funds are the total peso-denominated deposits generated by a bank from the public, less various items including payables, deposits by government entities, and liquidity provisions.

Earlier, universal, commercial, and thrift banks aired their concern over the tighter Agri-Agra law, saying that mandated lending to any certain sector could adversely affect their lending business.

This is because the projects involved must first be certified viable, while loans should be extended only to credit-worthy borrowers, the banks explained.

They said banks would run a greater risk of incurring more bad debts because of mandated lending to any sector, especially one where some borrowers are not considered credit-worthy.