The Bangko Sentral ng Pilipinas (BSP) wants to restrict the borrowings of local government units (LGUs) from government banks such as Land Bank of the Philippines, the Development Bank of the Philippines and Philippine Veterans Bank.

The Monetary Board, which issued a resolution in January instructing a review of the BSP's jurisdiction to limit LGU loans from GFIs, is currently assessing banks, not just state-controlled banks, total investments in debt securities issued by LGUs.

The BSP's Department of Loans and Credit reported that in 2009, both government and private banks invested P1 billion in debt securities issued by LGUs. The amount did not include rural banks and non-bank financial institutions since these were not yet covered by the Financial Reporting Package for the said period.

Of the P1 billion, the big banks accounted for 96 percent or P963 million of the total investments by banks in LGU bond floats.

The Local Government Code of 1991, or Republic Act No. 7160, authorized LGUs to issue bonds as an alternative means of raising funds for local projects. Unlike traditional LGU fund sources such as IRA, loans and grants, municipal bonds can be used only to finance self-liquidating development  projects since the source of repayment comes from cash flows generated by the project itself.

The central bank noted that it was Philippine Veterans Bank with investments in LGU debt notes worth P340 million as the largest while Philippine National Bank was next with P194.5 million.

Philippine Veterans Bank bought P170 million worth of debt papers issued by Toledo City, P82.5 million by Pasay City, P80 million by San Ildefonso, Bulacan and P8 million by Calatagan. PNB, in the meantime, subscribed to government debts issued by Surigao del Sur province.

United Coconut Planters Bank invested P140 million when it tapped Marinduque's securities float in 2009 while Rizal Commercial Bank Corp. had a P121.5 million exposure in the Laguna bonds.

DBP only had P84 million in Butuan City while commercial bank Maybank invested P83 million in Pasay Kaunlaran Bonds. The other banks with LGU bond purchases were Philippine Postal Savings Bank, Premiere Development Bank and Banco Filipino Savings and Mortgage Bank.