BSP Lays Down Incentives For Green Financing

The Bangko Sentral ng Pilipinas (BSP) will grant as perks an additional 15% single borrower limit (SBL) and zero percent reserve requirement ratio (RRR) for the financing of green or sustainable projects.

Photo Insert: The BSP is granting incentives to green financing as part of its 11-point Sustainable Central Banking (SCB) Strategy to “scale up sustainable finance."

In a draft circular, the BSP is prepared to give banks an additional 15% SBL on loans, credit accommodation and guarantees including transition activities to decarbonization until Dec. 31, 2030.

It also plans to reduce green-minded banks’ RRR to zero percent against outstanding and new issuances of sustainable bonds. The zero percent perks are for big banks, digital banks and thrift banks. Non-green bonds will however require a three percent RRR.

“This measure aims to support the financing of green and sustainable projects, including transition activities that contribute to the achievement of the National Government (NG)’s climate commitments and sustainable development goals as laid down in the Philippine Development Plan and Nationally Determined Contributions,” according to BSP Governor Felipe M. Medalla in the proposed circular.

Based on the draft circular, BSP will give an additional 15% SBL of the net worth of a bank if they meet certain conditions for the financing of green or sustainable projects including decarbonization.

More importantly, green financing should be based on any of the principles or eligible categories of projects under any of these documents: the NG Sustainable Finance Framework; Tier II of the NG’s Strategic Investment Priority Plan on Green Ecosystems, health security-related activities, and food security related activities; Philippine Sustainable Finance Guiding Principles; ASEAN Taxonomy for Sustainable Finance; or Forthcoming Philippine Sustainable Finance Taxonomy Guidelines.

In addition, the BSP will extend perks if the lending bank will make sure it will not violate any environmental laws and regulations which negatively affect socioeconomic aspects and that “the standard prudential controls designed to safeguard creditors’ interests in the grant of financing to sponsors or owners are in place which may include negative pledge covenants or a lien on share.”

The lending bank will also ensure the following: require the borrower to assign in favor of the bank all proceeds arising from insurance policies covering the green or sustainable project, including transition activities to decarbonization, among others, as collateral to secure the loan or credit facility; and that the credit risk concentration arising from total exposures to all borrowers pertaining to such eligible green or sustainable projects will be considered by the bank in its internal assessment of capital adequacy relative to its overall risk profile and operating environment.

Furthermore, the BSP said that starting on Jan. 1, 2031, the amount of any new loan, credit accommodation, or guarantee extended as well as the restructured, renewed, and refinanced existing credit exposures, will not exceed the prescribed SBL of 25 percent.

But, it added, “outstanding loans, credit accommodations, or guarantees as of 31 December 2030 that are granted using the additional SBL of 15 percent may be maintained. The lending bank shall honor the term of such loans or credit accommodations until the maturity period,” said the BSP.

Banks are given until June 23 to submit their comments or other suggestions to the BSP’s proposed perks for green financing. The Monetary Board will take the private sector’s recommendation into consideration before approving the incentives package.

When the pandemic was in its early months, the BSP raised the SBL from 25% of a bank’s unimpaired capital to 30% as additional operational relief measures. From time to time, the BSP increases the SBL cap or grants separate SBL but as a general rule, banks and non-banks should spread their risks.

The BSP is granting incentives to green financing as part of its 11-point Sustainable Central Banking (SCB) Strategy to “scale up sustainable finance."

The SCB Strategy, launched last January, provides 11 action points integrating sustainability principles in its key operations and functions for the overall sustainability agenda in the Philippine financial system.

Medalla said climate change and other environmental hazards impact the prices of goods and change the risk profile of financial institutions. But with the SCB, the BSP will adopt policies that are “conducive to the adoption and growth of sustainable finance” and also adheres to “the same standards set for supervised financial institutions in managing risks and in making environmentally and socially responsible investment decisions,” said Medalla.

In terms of BSP’s sustainability rules and regulations for all banks, it has already issued the first and second phase frameworks, while the third phase is still ongoing which includes the incentivization for the lending or financing of sustainable projects.

In the next months and years, the BSP will issue more regulations including the conduct of climate risk stress testing by banks and improvements to prudential reports for data collection and surveillance analysis.

The Philippines has committed to reducing its carbon emissions by 75 percent by 2030 under the UN Framework Convention on Climate Change. The BSP, with the Department of Finance, also co-chairs the Green Force which is responsible for the country’s sustainable finance roadmap.

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