MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) said there are advantages to having related non-governmental organizations (NGOs) or foundations that are also engaged in microfinance services and the BSP still encourage NGOs to become regulated financial institutions (RFIs).

Sources, citing a BSP study on the issue of NGOs/foundations that have evolved to become RFIs, said despite the recent issuance of a restricting circular last June the central bank is still supportive of NGOs with microfinance operations to becoming RFIs in order to gain access to capital.

The circular, said the same sources, only allowed the BSP to check the risks of the relationship of a bank to their related NGO/foundation microfinance operations such as the weakness in board and management due to interlocking directorship issues, control of the microfinance loan portfolio and how capital is being utilized.

The issue on DOSRI (directors, officers, stockholders and related interests) in particular, is one of the most significant risks addressed by the new circular, or Circular No. 725. Specifically, the BSP now applies DOSRI caps to the loans these NGOs/foundations operating as an RFI. Presently the BSP monitors 18 microfinance-oriented banks operating as RFIs.

These NGOs/foundations, while classified as non-stock and non-profit organizations, offers financial assistance to its customers.

The BSP’s Manual of Regulations for Banks (MORB) defines “related interest” as any “corporation, association or firm which a director or officer of the bank or his spouse is also a director or officer of such corporation …”

Based on this definition, the BSP deemed it appropriate to impose the DOSRI limit to related NGOs/foundations. All loans, other credit accommodations and guarantees to such related NGO/foundation will be included in determining a related bank’s compliance with DOSRI caps, which is 10 percent and five percent for unsecured limits, and aggregate 20 percent limit on loans.

Of the 18 RFIs, 13 are operating as rural banks, the rest as thrift banks.

The BSP have had to issue the circular since based on studies and monitoring, such close relationship between a bank and its NGO/foundation may be subject to abuse that could increase operational, governance and reputational risks, brought about by common board memberships, shared resources and loan transfers, among others.

“The new regulations and governance standards aim to mitigate risks resulting from the unique relationship and increased volume of transactions entered into by banks and their related NGOs/foundations,” said the BSP.

The new circular did not only redefined what related microfinance NGOs/foundations mean, but also prohibited bank officers from holding any positions that may cause them to be involved in the daily microfinance operations of a related NGOs/foundations.