A General Introduction to Lending and Secured Finance in the Philippines
All the questions
The principal pieces of national legislation applicable to business loans and secured financing are Republic Act No. 386 (the Civil Code), Act No. 3135 (An Act Regulating the Sale of Property Under Special Powers Inserted in or immovable mortgages) and Republic Act No. 11057 (the Personal Property Security Act (PPSA)).
Commercial loans in the Philippines are usually offered by banking institutions. These are subject to monitoring by the Bangko Sentral ng Pilipinas (BSP). In addition, loan companies may also be licensed by the Securities and Exchange Commission (SEC) to engage in loan activities pursuant to the Loan Company Regulation Act of 2007. Typically, the operations of these lending companies are limited to small business loans and retail customer loans.
Legal and regulatory developments
i The PPSA
The PPSA was enacted on August 17, 2018 to strengthen the legal framework for secured transactions in the Philippines. It provides for the creation, perfection, determination of priority, establishment of a centralized registry of notices and enforcement of security interests in personal property (both tangible and intangible), except aircraft and ships.
The PPSA entered into force on February 9, 2019. However, its full implementation is conditional on the publication of the relevant implementing rules and regulations and the establishment and operation of a new register (in which notices of security created under the PPSA may be registered). In this regard, the Implementing Rules and Regulations of the PPSA (PPSA Rules) were published on November 18, 2019 and entered into force on December 3, 2019. The PPSA Rules directed the Land Registration Authority (LRA) to establish the register within six months of the publication of the PPSA Rules.2 The LRA announced the soft launch of the Personal Property Security Registry (PPSR) on March 25, 2021 for user account registration and issued certain regulations for PPSR registration and migration; but upon investigation, the LRA noted that the PPSR should not yet be interpreted as fully implemented and operational.
The period between the entry into force of the PPSA and the date of establishment of the register is referred to in that law as the “transition period”.3
The PPSA covers all movable collateral used in all transactions of any form which secure an obligation with movable collateral (whether tangible or incorporeal), except interest on aircraft subject to the 2008 Act on the Civil Aviation Authority and interest on ships subject to the decree on mortgages on ships. from 1978.4
The PPSA has amended or repealed certain laws inconsistent with its provisions.5 This includes the Civil Code as it relates to the creation of pledges and the Chattel Mortgage Act as it relates to the creation of chattel mortgages and procedures for registering security interests in personal property in the Philippines.
The new rules introduced by the PPSA regarding the creation and third-party effectiveness of security interests in movable property are discussed in more detail in section IV.ii.
The PPSA also establishes a new set of rules for determining the priority of a security interest in the same collateral. Under the PPSA, the priority of security interests in the same encumbered asset is always determined by the time of perfection; however, there are specific rules that apply depending on the nature and type of property involved.
With respect to enforcement, there are two ways to enforce security under the PPSA: a secured creditor may sell or otherwise dispose of the collateral, publicly or privately; or a secured creditor may offer to the debtor and grantor to take all or part of the security right in full or partial satisfaction of the secured obligation, subject to certain notice and consent requirements.6 The debtor is also required to make good any default. Under previous laws governing pledges, a secured creditor no longer has the right to recover any deficit after a foreclosure sale.
ii Amendments to the Compendium of Foreign Exchange Regulations
BSP introduced amendments to the Handbook of Foreign Exchange Regulations, which is a consolidation of all regulations governing foreign exchange transactions. The amendments seek to liberalize restrictions on private sector lending denominated in foreign currencies, among others.
Under previous BSP regulations, prior approval must be obtained to contract a private sector foreign currency loan.
This requirement was removed in BSP Circular No. 984, Series of 2017. Under this issuance, foreign currency denominated loans from private sector borrowers that are not guaranteed by the government no longer require approval. advance payment from the BSP to enable the borrower to ensure payment of principal and interest on the loan from foreign currency purchased from the Philippine banking system. To this end, the BSP requires that such loans be registered with the BSP within a certain period of time after the loan proceeds are drawn or used.
In addition, under BSP Circular No. 1030, Series of 2019, foreign currency loans by private sector borrowers resident with banks operating in the Philippines that are not guaranteed by the government no longer require subsequent registration. Borrowers are only required to report these loans to the BSP using the prescribed forms.
iii Basel III Implementation Guidelines
In December 2010, the Basel Committee on Banking Supervision introduced a set of reforms, Basel III, including standards to strengthen the definition of capital and the introduction of capital buffers to withstand economic and financial soundness. PASB adopted these reforms in stages.
On January 15, 2013, BSP published the Basel III Implementing Guidelines on Minimum Capital Requirements. This publication, which came into effect in 2014, sets out guidance on the revised risk-based capital adequacy framework, in particular on minimum capital and disclosure requirements.
In October 2014, Implementing Guidance on the Framework for Dealing with National Systemically Important Banks under Basel III was issued to address systemic risk and interdependence by identifying banks deemed to be systemically important within the domestic banking sector and imposing minimum capital buffers on them.
On June 9, 2015, the BSP published the Basel III Leverage Ratio Framework, which acts as a complementary measure to the risk-based capital requirements. The leverage ratio aims to limit the accumulation of leverage in the banking sector. On March 10, 2016, the BSP published the Basel III framework on liquidity standards – liquidity coverage ratio and disclosure standards.
These reforms only apply to universal and commercial banks and their subsidiaries and quasi-banks.
iv FIST Law
On February 16, 2021, Republic Act No. 11523 or the Financial Institutions Strategic Transfer Act (FIST) was enacted to help banks and financial institutions (FIs) get rid of their non-performing assets (NPAs). ) and non-performing loans (NPLs) through transfers to FIST companies. The FIST law aims to strengthen the financial sector and cushion the negative economic impact on banks and other financial institutions of the covid-19 pandemic. FIST companies are similar to special purpose vehicles and have been given the power to collect, dispose, manage and operate NPAs and restructure and condone NPLs acquired from FIs under the FIST Act.
The transfer of NPAs and NPLs from FIs to a FIST company will be exempt from documentary stamp duty, capital gains tax, value added tax, chargeable withholding tax and tax on gross receipts.
v Capping interest rates and other fees charged by lending companies
On December 22, 2021, the BSP issued Circular No. 1133, Series 2021, which prescribes caps on interest rates and other fees charged by Loan Companies (LCs), Finance Companies (FCs) and their online lending platforms (OLP). The imposition of interest rate caps is consistent with Republic Act No. 9474 (the Finance Companies Regulation Act of 2007) and Republic Act No. 8556 (the finance companies), which empower the BSP Monetary Board to prescribe maximum interest rates that may be charged by LCs, FCs and their PLOs, in consultation with the SEC and the industry.
Interest rate caps apply to general purpose unsecured loans offered by LCs, CFs and their PLOs that do not exceed PHP 10,000 and are repayable within a period not exceeding four months.
The BSP has set a nominal interest rate ceiling of 6% per month (approximately 0.2% per day) for covered loans. In this regard, the BSP has also set a limit on the “effective interest rate” at a maximum of 15 percent per month (about 0.5 percent per day). This includes the nominal interest rate as well as applicable fees such as processing fees, service fees, notary fees, processing fees and verification fees, among others, but excludes fees and penalties for late payment or non-payment. In addition, the BSP has set the ceiling for penalties for late or non-payment at 5 percent per month. The BSP has also set a total cost cap of 100% of the total amount borrowed (applying to all interest, other fees and charges and penalties) regardless of the term of the loan. On March 1, 2022, the SEC issued Memorandum Circular No. 3, Series of 2022 which provides guidance on the implementation of BSP Circular No. 1133, Series of 2021. Under the Memorandum Circular No. SEC No. 3, Series of 2022, which became effective March 3, 2022, failure to meet the imposed caps will result in the imposition of penalties, including fines, suspension of financing and lending activities, revocation of the certificate of authority and the suspension or revocation of the company’s primary registration.
Perspectives and Conclusions
The recovery of the Philippine economy seems to be gaining ground. The annual growth of 5.6% is above the Philippine government’s target range of 5 to 5.5%. This can be attributed to the easing of restrictions in the last months of 2021 and the reopening of the economy.38
The Business Recovery and Tax Incentives for Businesses Act (the CREATE Act) was enacted on March 26, 2021. The CREATE Act provides immediate tax relief for micro, small and medium-sized enterprises that are reeling from COVID-19, and aims to increase the Philippines’ global competitiveness by implementing key tax policies to attract investment. According to the BSP, the return to the pre-pandemic growth level in 2022 depends on the implementation of the CREATE law and the FIST law.39