Accounting Alert: BSP Regulatory Treatment of Restructured Loans of BSFIs for Purposes of Measuring Expected Credit Losses

This Accounting Alert is issued to circulate Bangko Sentral ng Pilipinas (BSP) Memorandum No. 2021-56 dated October 21, 2021 on the regulatory treatment of restructured loans for purposes of measuring expected credit losses (ECL) amid the pandemic.

Overview

The continuing uncertainty in the economic environment because of the COVID-19 health crisis has adversely affected the income, cash flows, and financial position of households and businesses.  In this respect, the BSP expects its Supervised Financial Institutions (BSFIs) to grant relief measures to their borrowers to reduce their debt burden and ultimately contribute to economic recovery.  These relief measures include, among others, modifying the terms and conditions of the loan agreements to reflect the change in the borrowers’ projected cash flows and improve the probability of full collection.

The guidelines on the regulatory treatment of restructured loans for purposes of measuring expected credit losses shall be effective until December 31, 2022.

Assessment of Significant Increase in Credit Risk

BSFIs have modified or changed the original terms and conditions of the loan agreements in response to the application of the mandatory grace period under the Bayanihan to Heal as One Act and the Bayanihan to Recover as One Act, and to grant relief to their borrowers who have been affected by the pandemic. 

1. Modifying contractual terms of the loans

Loan modification should be targeted at providing sustainable support measures to creditworthy borrowers experiencing financial difficulty to help promote overall loan quality and contribute to broader economic recovery.  In this respect, BSFIs should establish prudent criteria in assessing and modifying the loan terms and conditions.  BSFIs should also monitor the changes of the risk of default of the concerned borrowers at both the portfolio and individual levels as new information emerges, as well as evaluate the effectiveness of the relief measure extended.

2. Classifying modified loans into stages to determine ECL

a. Modified loans may be classified under Stage 1, 2, or 3 for purposes of determining the ECL.  The classification shall be based on the assessment of the extent of financial difficulty of the borrowers and their ability to fully pay the loan based on the revised terms:

b. Grant of payment deferral or extension of the term of the loan shall: (i) not automatically be considered an indicator of significant increase in credit risk, hence should not result in the loan automatically being classified under Stage 2 or 3, and (ii) not warrant the classification of the account as a “restructured loan”: Provided, that prior to the grant of payment deferral or extension of the term of the loan, the borrower has continuously paid the account on schedule and the borrower exhibits the capacity to repay the loan under the modified terms.

Other forms of modification of the terms and conditions of the loan in view of the financial difficulty of the borrower, shall warrant the classification of the account as either under Stage 2 or 3, depending on the severity of the financial difficulty of the borrower.  These accounts shall be reported as restructured in the prudential reports.

Treatment of Restructured Loans

Loans that have been restructured to support borrowers that are experiencing financial difficulties due to the pandemic should not automatically be considered as credit-impaired that will warrant the classification of the accounts as non-performing.  BSFIs are expected to holistically assess the borrower's repayment capacity, revised cash flows, and financial position.

Regulatory Reporting

BSFIs shall maintain an updated record of all borrowers whose loans have been modified due to the COVID-19 pandemic, including risk classification, staging, and provisioning, to closely monitor, manage, and report the changes in the risk of default of these loans at both the portfolio and individual levels.

You may download a copy of the BSP Memo here.