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Microfinance in the Banking Sector. Presentation for APRACA CENTRAB Participants 15 December 2011. Presentation Outline. Mandate and Role of the BSP BSP Issuances on Microfinance Definition Licensing and Branching Incentives Safe and Sound Operations Expanded activities

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microfinance in the banking sector

in the Banking Sector

Presentation for APRACA CENTRAB Participants

15 December 2011

presentation outline
Presentation Outline
  • Mandate and Role of the BSP
  • BSP Issuances on Microfinance
    • Definition
    • Licensing and Branching
    • Incentives
    • Safe and Sound Operations
    • Expanded activities
    • Issuances Implementing Various Laws
  • Microfinance Exposure of Banks
bsp mandate
BSP Mandate
  • The General Banking Law of 2000 (Republic Act No. 8791, Sections 40, 43 and 44) mandates BSP to recognize the peculiar characteristics of microfinance in the requirements, terms and amortization of loans and other credit accommodations
  • BSP approach is to develop a microfinance “friendly” policy and regulatory environment to:
    • Allow banks to have a wider scope for safe, sound and sustainable microfinance operations
    • Protect the depositors, microfinance clients and the financial system
role of the bsp
Role of the BSP

BSP is the regulatory and supervisory authority over all banking institutions, including those with microfinance operations

BSP issues rules and regulations for safe and prudent banking operations

The main basis for prudential regulation is to ensure the safety of public deposit taking activities

BSP conducts annual and special examination of its supervised institutions

BSP checks compliance with banking laws, rules and regulation, and uses the CAMELS instrument for bank supervision

  • Capital Adequacy
  • Asset Quality
  • Management
  • Efficiency
  • Liquidity
  • Sensitivity to Market Risks
microfinance issuances
Microfinance Issuances
  • BSP issues circulars, circular letters and memos which set rules/regulations/ guidelines that govern microfinance operations of banks
  • Issuances focus on the following:
    • Microfinance Definition
    • Licensing and Branching
    • Incentives for Microfinance
    • Rules for Safe and Sound Operations
    • Expanded Activities
    • Rules Implementing Various Laws
microfinance definition
Microfinance Definition
  • Circular 272 (30 Jan 2001)
    • Implements provisions of the General Banking Law
    • Recognizes cash-flow based lending as a peculiar feature of microfinance
    • Defines microfinance loans and
    • Provides for the exemption of microfinance loans from rules and regulations issued with regard to unsecured loans
microfinance definition7
Microfinance Definition
  • Circular 694, Annex A (14 Oct 2010)
    • Expands the definition of microfinance to include micro-deposits, micro-enterprise loans, micro-agriculture loans, housing microfinance loans and micro-insurance
  • Circular 678: Housing Microfinance Loans (6 Jan 2010)
  • Circular 680: Micro-Agri Loans (3 Feb 2010)
  • Circular 683: Microinsurance(23 Feb 2010)
  • Microfinance savings deposit accounts that cater to the needs of the basic sectors, low-income and unserved/ underserved clients
  • Microdeposits are designed and priced to fit the needs and capacity of the target market:
    •  Minimum maintaining balance not exceeding PhP 100
    •  Not subject to dormancy charges
    •  Only for individual microfinance clients whose average daily savings account balance does not exceed P15,000
microenterprise loans
Microenterprise Loans
  • Small and short term loans granted to the basic sectors, on the basis of the borrower’s cash flow, for their microenterprises and small businesses.
  • The principal amount of a microenterprise loan can be generally pegged at PhP150,000
housing microfinance loans
Housing Microfinance Loans
  • Loans granted for home improvements, house construction, house and/or lot acquisition using microfinance principles in accordance with BSP regulations
  • Maximum principal amount generally pegged at PhP300,000
  • Payment terms up to 15 years
  • Acceptable valuation in cases of usufruct, leases, etc.
  • Loan value up to 90% appraised of real estate mortgage (REM) or acceptable valuation in cases of usufruct, lease, freehold, right to occupy/build
  • Thrift, rural and cooperative banks can now market, sell and service approved microinsurance products of licensed insurance companies to their microfinance clients
  • Microinsurance is a financial product or service that meets the risk protection needs of the poor where:
    • The amount of premiums, contributions, fees or charges, computed on a daily basis, does not exceed five (5) percent of the current daily minimum wage rate for non-agricultural workers in Metro Manila; and
    • The maximum sum of guaranteed benefits is not more than 500 times the daily minimum wage rate for non-agricultural workers in Metro Manila.
  • Insurance Commission approves products and licenses companies
licensing and branching
Licensing and Branching
  • Circular 273 (27 Feb 2001)
    • Partial lifting of moratorium to allow opening of new microfinance-oriented thrift and rural banks and branches
    • Provides opportunity for MF NGOs to formalize as banks so they can mobilize savings from the general public
  • Requirements for licensing:
    • Majority of the board with microfinance experience and at least one with actual banking experience
    • At least 50% of gross loan portfolio shall consist of microfinance loans
    • Efficient loan tracking system
licensing and branching13
Licensing and Branching
  • Circular 340 (30 Jul 2002)
    • Provides rules on establishment of loan collection and disbursement points (LCDPs)
  • Circular 365 (16 Jan 2003)
    • amends C340 relative to MF-oriented Banks
  • Circular 369 (17 Feb 2003)
    • Amends C340 relative to minimum capitalization requirements for thrift/ cooperative banks in the NCR
licensing and branching14
Licensing and Branching
  • Circular 505 (22 Dec 2005)
    • Allows qualified microfinance-oriented banks and microfinance-oriented branches of regular banks to establish branches anywhere in the Philippines
  • Circular 624 (13 Oct 2008)
    • Amends branching policy and provides guidelines on the establishment of extension offices and other banking offices (OBOs)
licensing and branching15
Licensing and Branching
  • Circular 669 (22 Oct 2009)
    • Allows OBOs/LCDPs of microfinance-oriented banks/ branches to service limited withdrawals of microfinance clients
  • Circular 694 (14 Oct 2010)
    • Amends portions of C624 and C669, classifies OBOs into regular OBO and microfinance OBO (MF-OBO) or microbanking office (MBO)
    • Expands the range of activities that MBOs can provide to microfinance clients
circular 694 obos
Circular 694: OBOs
  • OBOs: any permanent place of business other than head office/branch/extension office, engaged in any/all of the following non-transactional activities:  
    • Market bank products and services
    • Accept loan applications, conduct preliminary credit evaluation, perform credit administration support
    • Host on-site ATMs
    • Perform customer care services
    • Perform customer identification, receive account opening documents, facilitate account activation (account opening approval and actual opening of deposit accounts done only head office/branches/extension office)
    • Other BSP authorized non-transactional banking-related activities
circular 694 mbos
Circular 694: MBOs
  • MBOs: primarily cater to banking needs of microfinance clients and overseas Filipinos (OFs) and their beneficiaries. Aside from non-transactional activities, they may also engage in any/all of the following transactional activities:
    • Accept micro-deposits including initial deposit, and service withdrawals
    • Accept check deposits for credit to MF clients’ deposit accounts
    • Disburse/release proceeds of microloans and collect loan amortization payments
    • Present, market, sell and service microinsurance products
    • Receive/pay-out funds for authorized remittance transactions
circular 694 mbos18
Circular 694: MBOs
  • Continuation of allowable MBO activities:
    • Act as a cash/money in and cash/money out for e-money
    • Collect premiums/pay out benefits of social security institutions (GSIS, SSS, PhilHealth, Employees’ Compensation Commission, other government authorized pension and benefit systems)
    • Pay-out benefits under government-sponsored conditional cash transfer (CCT) scheme
    • Accept utilities payments
    • Purchase foreign currencies up to the maximum equivalent of USD300 per client per day for credit to micro-deposit accounts
mf incentive rediscounting
MF Incentive: Rediscounting
  • Circular 282 (19 Apr 2001)
    • Opens a rediscounting facility for rural/cooperative banks to refinance their microfinance loan portfolios
  • Circular 324 (2 Mar 2002)
    • Opens a rediscounting facility for thrift banks engaged in microfinance
  • Circular 515 (3 Mar 2006) amends C282 and 324:
    • One year track record
    • At least 500 active microfinance borrowers
    • Portfolio-At-Risk of not more than 5%
    • Repayment rate of 95%
mf incentive reduced risk weight
MF Incentive: Reduced Risk Weight
  • Circular 364 (19 Jan 2003) reduces risk weight applicable to small and medium enterprises (SMEs) and microfinance loan portfolios that meet prudential standards to 75%
    • Highly diversified portfolio
    • Portfolio-At-Risk at 5% for last three years
    • Adequate risk management processes
    • CAMELS of “3”; Management score of “3”
mf incentive relaxed documentary requirement for client
MF Incentive: Relaxed Documentary Requirement for Client
  • Circular 549 (9 Oct 2006)
    • Exempts microfinance clients from the required submission of additional documents for the granting of loans
  • Circular 608 (20 May 2008)
    • Revises rules on acceptable identification cards, lessened the ID requirement to 1 valid card (previously required 2) and widened the range of acceptable IDs
issuances to ensure safe sound sustainable operations
Issuances to Ensure Safe, Sound, Sustainable Operations
  • Circular 409 (14 Oct 2003)
    • Sets rules, regulations and standards for microfinance operations of banks, specifically the measurement of Portfolio at Risk and Loan Loss Provisioning
  • Portfolio-At-Risk (PAR):
    • Outstanding principal amount of all loans that have at least one installment of principal past due for one day
    • Includes entire unpaid balance, including both past due and future installments but not accrued interest
    • Includes restructured or rescheduled loans
circular 409 loan loss provisioning for microfinance
Circular 409: Loan Loss Provisioning for Microfinance

Note: Microfinance loans past due for over 91 days and are fully provisioned may be written off

issuances to ensure safe sound sustainable operations24
Issuances to Ensure Safe, Sound, Sustainable Operations
  • Circular 607 (30 Apr 2008)
    • Identifies the reportorial requirements for all banks engaged in retail microfinance
    • Sets guidelines on how the report should be accomplished
  • Circular 725 (16 Jun 2011)
    • Provides the framework for governance arrangements and contractual agreements between a bank with microfinance operations and its related microfinance NGO
microfinance through mobile technology
Microfinance Through Mobile Technology
  • Circular 649 (09 Mar 2009)
    • Guidelines governing issuance of electronic money (e-money) and operations of electronic money issuers (EMIs) in the Philippines
    • Defines e-money as electronic surrogate for cash, redeemable at face value, not a deposit
    • Ensures that bank/non-bank EMIs have the necessary capacity (e.g. capital requirements, IT systems and security features and internal controls)
    • Ensures compliance to anti-money-laundering rules (e.g. KYC, recording, reporting suspicious transactions, transaction caps, etc.)
    • Ensures consumer protection
microfinance institution rating agencies
Microfinance Institution Rating Agencies
  • Circular 685 (7 Apr 2010)
    • Creates an enabling environment for the use of objective, credible and competent third-party ratings of MFIs
    • Ensures that MIRAs
      • Demonstrate commitment to comply with relevant rules and regulations
      • Possess technical capability, experience and organizational resources to provide objective and transparent ratings
      • Use a rating framework that reflects all material facets of microfinance operations, its attendant risks and operational challenges.
    • BSP recognition valid for three years and may be renewed
implementing various laws
Implementing Various Laws
  • Circular 730 (20 July 2011, effective 1 July 2012)
    • Enhances loan transaction transparency, as mandated in the Truth in Lending Act
    • Requires banks to only charge interest based on the outstanding balance of a loan
    • Defines effective interest rate and requires that this will be the only rate used in all loan documents and marketing materials
    • Requires a uniform disclosure of the loan terms
    • Requires banks to post in conspicuous places the revised format of disclosure statement. The posters shall include an explicit notification that the disclosure statement is a required attachment to the loan contract and the customer has a right to demand a copy.
implementing various laws28
Implementing Various Laws
  • Circular 374 (11 Mar 2003)
    • Implements provisions on credit delivery for Barangay Micro Business Enterprises (BMBEs)
    • GFIs to set up a special credit window that will service the financing needs of BMBEs either thru retail or wholesale lending
  • Circular 570 (24 May 2007)
    • Allows wholesale loans of universal/commercial banks and branches of foreign banks to non-bank MFIs as compliance to the 6% mandatory credit allocation to small enterprises
implementing various laws29
Implementing Various Laws
  • Circular 625 (14 Oct 2008)
    • Implements the Magna Carta for MSMEs:
    • Mandatory allocation of at least 8% for micro and small enterprises and at least 2% for medium enterprises of their total loan portfolio for a period of 10 years (2008-2018)
    • Submission of compliance reports to BSP on a quarterly basis
contact information
Contact Information

Micro, Small and Medium Enterprise Finance Specialist Group

Supervision and Examination Sub-Sector I

Supervision and Examination Sector

10th Floor, Multi-Storey Building


Mabini, Manila

(632) 708-7701 local 2782

(632) 708-7397


Gerardo A. Butardo

Deputy Director


thank you

Thank you.