Article IV.

Loans to Banking and Other Financial Institutions

 Credit Policy
The credit policy of the Bangko Sentral ng Pilipinas (BSP) serves as the overarching
framework guiding its lending operations to banking and other financial institutions. This
policy is not static but rather a dynamic instrument that evolves in response to the
prevailing macroeconomic conditions and the BSP's assessment of risks to both price
stability and financial stability within the Philippines, including the specific economic
context of Laoag City and the Ilocos Region.
At its core, the credit policy aims to manage the level of liquidity in the financial system.
Liquidity refers to the availability of funds for banks to meet their obligations and extend
credit. The BSP uses its lending facilities as a tool to either inject or withdraw liquidity,
thereby influencing the overall money supply in the economy. Too much liquidity can fuel
inflationary pressures, where the increased amount of money chases a limited supply of
goods and services, leading to rising prices that erode the purchasing power of Filipinos
in Laoag City and nationwide. Conversely, insufficient liquidity can stifle economic
activity by making it harder and more expensive for businesses to access the credit they
need to invest and grow, potentially hindering development in the Ilocos Region.
Furthermore, the BSP's credit policy has a strong prudential dimension. It recognizes
that the soundness of the banking system is paramount for financial stability. Therefore,
a significant aspect of the credit policy involves ensuring that banks themselves have
robust credit risk management systems in place. Circular No. 855, for instance,
mandates that banks establish comprehensive frameworks for evaluating borrowers,
setting credit limits, monitoring loan performance, and managing potential losses. This
is crucial for maintaining the health of individual banks in Laoag City and the overall
stability of the financial sector in the Ilocos Region and the Philippines. By promoting
responsible lending practices at the individual bank level, the BSP aims to reduce the
likelihood of widespread defaults that could trigger systemic risks.
The credit policy also serves as a mechanism for the BSP to signal its monetary policy
stance to the market. The terms and conditions under which the BSP is willing to lend to
banks, particularly the interest rates it charges, provide clear signals about its intentions
regarding the direction of interest rates and the overall availability of credit in the
economy. For example, a lowering of the BSP's policy rates and a loosening of
rediscounting requirements might indicate a desire to stimulate borrowing and economic
activity, potentially benefiting businesses in Laoag City seeking financing.
Moreover, the BSP's credit policy can be strategically used to support specific sectors
deemed vital for economic development. The differentiated terms and eligibility criteria
under the rediscounting facility, as we will discuss later, allow the BSP to incentivize
lending to areas like agriculture (important in the Ilocos Region), exports, and small and
medium enterprises (CSMEs), thereby channeling credit towards productive activities
that contribute to job creation and economic growth across the Philippines.
  How BSP lends out to banks.
The Bangko Sentral ng Pilipinas (BSP) provides credit to banks through several key
facilities, each designed to address different liquidity needs and support the overall
stability and efficiency of the financial system in the Philippines, including the banking
sector in Laoag City and the Ilocos Region.
o Rediscounting Facility: This is a standing credit facility offered by the
BSP to help banks meet their temporary liquidity needs by refinancing the
loans they have already extended to their clients. Think of it as a bank
taking its existing, good-quality loan "receivables" (the money owed to
them) and using them as collateral to borrow funds from the BSP. The
BSP charges an interest rate (the rediscount rate) for this service. This
mechanism allows banks in Laoag City, for example, to replenish their
lendable funds, enabling them to extend more credit to local businesses
and individuals. The rediscounting facility also serves as a tool for the BSP
to influence the cost and availability of credit in the broader economy. By
adjusting the rediscount rate and the eligibility criteria for loan papers, the
BSP can either encourage or discourage banks from borrowing, thereby
impacting overall liquidity. The operations of this facility are managed by
the Department of Loans and Credit (DLC) within the BSP.
o Overdraft Credit Line (OCL): The OCL is a very short-term credit facility
available to banks that directly participate in the clearing operations of the
Philippine Clearing House Corporation (PCHC). Clearing is the process by
which banks settle payments with each other. At the end of a business
day, a bank might temporarily have a slight deficit in its clearing account
with the BSP due to the timing of debits and credits. The OCL allows these
banks to cover these temporary shortfalls overnight (MORB - Section 802
and Appendix 25). This ensures the smooth and efficient functioning of
the national payment system, which is crucial for all financial transactions,
including those in Laoag City and the Ilocos Region. The interest rate
charged on OCL availments is typically higher than the BSP's policy rates
to discourage banks from using it as a regular source of funding and to
incentivize them to manage their daily liquidity positions carefully.
o Emergency Loan: In situations where a bank faces serious liquidity
problems due to unforeseen events beyond its control, the BSP may, at its
discretion, extend a fully secured emergency loan. This is a measure of
last resort to prevent the failure of an otherwise solvent bank and to
safeguard the stability of the financial system as a whole, which would
have repercussions for all regions, including the Ilocos. The granting of an
emergency loan requires the approval of the Monetary Board (MB) and is
subject to stringent conditions (Republic Act No. 7653 (as amended by
R.A. No. 11211), Section 84 and MORB - Section 285). The borrowing
 bank must provide full collateral, typically in the form of government
securities or other high-quality, unencumbered assets. The amount of the
loan is limited to what is necessary to address the emergency, not
exceeding 50% of the bank's total deposits and deposit substitutes. The
interest rate charged on emergency loans is usually set at a level that
encourages the bank to resolve its liquidity issues promptly.
 Types of credit operation and its sub classifications.
The primary type of credit operation through which the BSP lends to banks based on
their existing loan portfolios is the rediscounting facility. This facility has several sub-
classifications, reflecting the different types of underlying loans that banks can use to
access funds from the BSP. These sub-classifications are designed to support various
sectors of the Philippine economy, including those significant in regions like the Ilocos.
o Peso Rediscount Facility: This allows banks to rediscount their peso-
denominated loan receivables. It is further sub-classified based on the
purpose of the original loans:
 Commercial Credits: These are short-term loans granted to
businesses for working capital purposes.
 Export Credit: Financing provided to exporters, either
before shipment (packing credit) to cover production costs or
after shipment but before payment is received (export bills
purchased - EB credit). Acceptable underlying documents
often include irrevocable letters of credit (LCs), confirmed
purchase orders (POs), or sales contracts (SCs), frequently
seen in businesses engaged in international trade,
potentially including those in the Ilocos Region exporting
local products.
 Import Credit: Financing extended to importers to fund the
purchase of goods from abroad, often secured by trust
receipts. This supports businesses in Laoag City and the
Ilocos Region that rely on imported raw materials or goods
for resale.
 Other Commercial Credits: A broad category covering
financing for domestic trade, including the purchase and sale
of goods within the Philippines, industrial processing for
indirect exports, and other eligible commercial activities that
support local businesses in the Ilocos. These loans are often
secured by chattel mortgages or assignments of receivables.
 Industrial Loans: These are loans extended to industries involved
in manufacturing and processing. They often have longer tenors
 than commercial credits and are typically secured by a Deed of
Real Estate Mortgage (REM) on the industrial property. Supporting
industrial development is important for job creation and economic
diversification in regions like the Ilocos if they have manufacturing
sectors.
 Other Credits: This category encompasses loans with specific
developmental objectives:
 Microfinance Loans: Loans granted by microfinance
institutions (MFIs) to small entrepreneurs and low-income
households. Rediscounting these loans encourages banks to
support financial inclusion in communities across the
Philippines, including those in the Ilocos Region.
 Small Loans for CSMEs (Cottage, Small, and Medium
Enterprises): Loans to smaller businesses that are vital for
local economic growth and employment generation in areas
like Laoag City and the Ilocos Region.
 Agricultural Loans: Financing provided to farmers and
agricultural enterprises for various activities, such as crop
production, livestock raising, and the acquisition of farm
equipment. Given the significant agricultural sector in the
Ilocos Region (known for products like rice, tobacco, and
garlic), the availability of rediscounting for these loans is
particularly important for supporting the livelihoods of many
local residents and ensuring food security. Acceptable
collateral often includes REM on agricultural land or chattel
mortgages on crops or livestock.
o Exporters' Dollar and Yen Rediscount Facility (EDYRF): This facility
allows banks to access dollar or yen funds by rediscounting eligible export
loan papers. This directly addresses the foreign currency financing needs
of Philippine exporters, making it easier for them to engage in international
trade. While the borrower might be based elsewhere, businesses in the
Ilocos Region involved in the supply chain or direct export would indirectly
benefit from this facility. The acceptable underlying collaterals are similar
to those under the peso rediscount facility but are denominated in US
dollars or Japanese Yen.
 Credit terms, Interest and its concept.
When the BSP extends credit to banking and other financial institutions, the
transactions are governed by specific credit terms, and the cost of borrowing is
determined by interest rates. Understanding these terms and the concept of interest is
crucial for banks in Laoag City and across the Philippines to manage their funding costs
and lending strategies.
o Credit Terms: These are the specific conditions under which the BSP
provides loans:
 Loanable Amount/Rediscount Rate: For the rediscounting facility,
the BSP typically lends a certain percentage of the rediscount value
of the eligible loan papers presented by the bank. This percentage,
known as the rediscount rate (not to be confused with the interest
rate charged), is determined by the Monetary Board and can vary
depending on the type of underlying credit and the BSP's policy
objectives.
 Interest Rate: Banks accessing the BSP's lending facilities are
charged an interest rate on the funds they borrow. For the
rediscounting facility, this is the rediscount rate (the cost of availing
the facility). For the OCL, a specific overnight overdraft rate applies,
usually higher than the policy rates. Emergency loans also have
their own interest rates set by the MB. These rates are key
monetary policy tools, influencing the cost of funds for banks and,
subsequently, the lending rates they charge to their customers in
Laoag City and elsewhere.
 Repayment Period: The time frame within which the borrowing
bank must repay the BSP. For rediscounted loans, the repayment
period is linked to the maturity of the underlying loan papers but
with maximum tenors set by the BSP for different types of credits.
OCLs are overnight facilities requiring repayment the next banking
day. Emergency loans have repayment terms determined by the
MB based on the specific circumstances.
 Collateral: For the OCL (collateralized portion) and especially for
emergency loans, the BSP requires the borrowing bank to pledge
acceptable assets, such as government securities, as security
against the loan. This mitigates the BSP's credit risk.
 Availment Limits: The BSP may set limits on the amount a bank
can borrow under each facility, often based on factors like the
bank's capital adequacy and the quality of its loan portfolio.
o Interest and its Concept: Interest is fundamentally the cost of borrowing
money or the return on lending money. It is the price paid by a borrower
for the use of a lender's funds over a specific period, expressed as a
percentage of the principal amount (the amount borrowed or lent).
  BSP's Policy Interest Rates: The BSP's Monetary Board (MB)
sets key policy interest rates that serve as benchmarks for the cost
of money in the Philippine economy:
 Target Reverse Repurchase (RRP) Rate (5.50 percent as
of April 10, 2025): This is the rate at which banks can
deposit funds overnight with the BSP and serves as the
primary monetary policy signal.
 Overnight Deposit Facility (ODF) Rate (5.0 percent as of
April 10, 2025): The interest rate on deposits held by banks
with the BSP overnight, forming the floor of the interest rate
corridor.
 Overnight Lending Facility (OLF) Rate (6.0 percent as of
April 10, 2025): The interest rate at which banks can borrow
funds overnight from the BSP against eligible collateral,
forming the ceiling of the interest rate corridor.
These policy rates influence short-term market interest rates and are a primary tool
used by the BSP to manage inflation and support economic growth across the
Philippines, including the Ilocos Region. The rediscount rate and other lending rates
charged by the BSP are typically linked to these policy rates. The level of these rates
affects the borrowing costs for banks in Laoag City, which in turn influences the lending
rates they offer to their local customers, impacting investment, consumption, and overall
economic activity in the region.