On June 9, 2023, the Monetary Board of the Bangko Sentral ng Pilipinas ("BSP") issued Circular No. 1174, amending the implementing regulations of the mandatory agricultural, fisheries and rural development financing contemplated by the Agriculture, Fisheries and Rural Development Financing Enhancement Act (Republic Act No. 11901 or the "Agri-Agra Reform Credit Act"). The implementing regulations were previously set out in BSP Circular No.1159 dated November 4,2022.

The Agri-Agra Reform Credit Act requires banks to set aside a minimum credit quota to finance the requirements of the Philippines' agricultural and fishing sectors. The statute repealed Republic Act No. 10000, which imposed asimilar credit quota requirement.

A general discussion of some of the more salient requirements under the Agri-Agra Reform Credit Act are discussed below.

1. What is the minimum agricultural and fisheries household rural development financing ("AFRD financing") requirement?

In line with the Philippine government's avowed policy of enhancing access of rural communities and agricultural and fisheries households to financial services and programs,the Agri-Agra Reform Credit Act provides that all banking institutions, whether government or private (except newly established banks for a period of five years from the date of commencement of the banks' operations) must set aside a credit quota (or a minimum mandatory AFRD financing requirement) of at least twenty-five percent (25%) of their "total loanable funds" generated from and after August 18, 2023 (the second year of effectivity of the Agri-Agra Reform Credit Act). The calculation of "total loanable funds" is discussed in item 4 below.

At least ten percent (10%) of banks' total loanable funds shall be made available for agrarian reform beneficiaries.

Banks need to submit quarterly reports on their compliance with the AFRD financing requirement to the BSP. Compliance is allowed on a "groupwide basis" (i.e., consolidation of parent/foreign bank branch and subsidiary banks that are at least majority-owned) and any excess compliance of any bank in the group may be used as compliance by any deficient bank in the same group.

2. How long will the AFRD financing requirement remain in effect?

Under the Agri-Agra Reform Credit Act, the AFRD financing requirement shall cease to have effect on the 10th year from approval of the statute (i.e.,from July 28, 2022). As clarified in BSP Circular No. 1159, the AFRD financing requirement will cease to be effective on July 28,2032.

3. What are the permissible modes of bank compliance with the AFRD financing requirement?

Under Circular No. 1159 (as amended by Circular No. 11774), from and after August 18, 2023, the modes by which banks may comply with the AFRD financing requirement include the following:

a. actual extension of loans to rural community beneficiaries for purposes of financing certain defined AFRD activities (e.g.,off-farm/fishery entrepreneurial activities, agricultural mechanization/modernization, digitalization/automation of farming, fishery, and agri-business activities and processes, and public rural infrastructure);

b. purchase of eligible loans listed in item (a) above on a without recourse basis from other banks and financial institutions;

c. purchase of eligible securities (gross of allowance for credit losses but net of unamortized premium or discount), such as but not limited to the following: (i) investments in debt securities issued by the Development Bank of the Philippines ("DBP") or Land Bank of the Philippines ("LBP"),the proceeds of which shall be used to finance certain defined AFRD activities (see above) as well as electronic platforms that facilitate agricultural value chain financing and agricultural supply chain financing transactions; (ii) investments in sustainable finance instruments, such as but not limited to green bonds, the proceeds of which shall be used for sustainable projects or programs that will benefit the country; (iii) investments In shares of stock in rural financial institutions or "RFIs" (i.e., financial institutions established and operating in a rural community) and the Philippine Crop Insurance Corporation (PCIC); and (iv) investments in micro, small and medium enterprises of farmers, fisherfolk, agrarian reform beneficiaries, tenant farmers, and other beneficiaries contemplated by the Agri-Agra Reform Credit Act by way of purchase of their securities through an organized market, initial public offering, follow-on offering, or through registered crowd funding intermediaries:

d. grant of certain eligible loans and other credits (gross of allowance for credit losses), such as the following: (i) placements in deposit accounts and/or fixed term deposit products with RFls; (ii) wholesale lending granted by banks to RFls; (iii) rediscounting facility granted by banks to other banks covering eligible AFRD financing; (iv) actual extension of loans intended for the construction and upgrading of infrastructure, such as but not limited to, farm-to-market roads, post-harvest facilities and other public rural infrastructure; and (v) actual extension of loans to agri-business enterprises that maintain agricultural commodity supply-chain arrangements directly with qualified rural community beneficiaries.

Loans, other credits and investments that are considered as compliance with the mandatory AFRD financing shall not be funded by proceeds from the issuance of debt securities, investments in deposit accounts/fixed term deposit products, and/or loans that have already been counted as compliance with the mandatory credit by other banks.

Notably, loans that finance activities which generally benefit agrarian reform beneficiaries or "ARBs" (in general terms, an ARB is a farmer who was granted land under the Comprehensive Agrarian Reform Law),agrarian reform communities or "ARCs" (ingeneral terms,an ARC is a barangay or cluster of barangays that is primarily composed of and managed by ARBs) or other identified priority sectors shall be counted at ten times their outstanding amount for purposes of determining compliance with the mandatory AFRD financing requirement.

4. How are a bank's "total loanable funds" calculated ?

In general terms, a bank's "total loanable funds" for purposes of determining compliance with the AFRD financing requirement are composed of the amount by which its deposits and certain other accounts increased from August 18,2023 (the reference date adopted for the Agri-Agra Reform Credit Act), less the amount by which its reserves against liabilities and provisions for liquidity increased since the same date (or plus the amount by which such reserves and provisions may have decreased since August 18,2023).

As implemented by the BSP's current regulations, from August 18, 2023, a bank's "total loanable funds" shall be computed as follows:

(1) The net increase from August 18, 2023 to the date of the bank's report of the individual accounts booked under the Regular Banking Unit which represent the following:

a. Total peso deposits (such as demand, savings, time and negotiable certificates of time deposit accounts), excluding: (i) deposits of banks, (ii) deposits of the national government, including its political subdivisions and instrumentalities, and (iii) deposits of government-owned and-controlled corporations ("GOCCs");

b.Bills payable excluding: (i) borrowings from the BSP in the form of rediscounting, emergency advances, availment of overdraft facilities, or other obligations, (ii) borrowings from the national government, including its political subdivisions and instrumentalities and GOCCs, (iii) interbank loans payable, (iv) other borrowings, in the form of (1) repurchase agreements with the BSP, national government including its political subdivisions and instrumentalities, and GOCCs, (2) repurchase agreements with banks, (3) certificates of assignment/participation with recourse with banks, (4) securities lendingand borrowing agreements with banks,and (5) other borrowings with banks; (v) other borrowings from special on-lending programs for AFRD financing, (vi) other borrowings from special financing programs other than for AFRD financing, (vii) other deposit substitutes in the form of emergency advances from the Philippine Deposit Insurance Corporation, and (viii) other sustainable debt instruments which are issued in accordance with domestic guidelines or international standards pertaining to green or sustainable finance accepted by the market,the proceeds of which shall be used for sustainable projects or programs that will benefit the country, and

c. Bonds payable, net of unamortized premium or discount excluding: (i) bonds issued by the DBP and LBP, the proceeds of which shall be used exclusively to finance certain AFRD activities (e.g., off-farm/fishery entrepreneurial activities, agricultural mechanization/modernization, digitalization/automation of farming, fishery, and agri-business activities and processes, and public rural infrastructure), and (ii) sustainable bonds which are issued in accordance with domestic guidelines or international standards pertaining to green or sustainable finance accepted by the market, the proceeds of which shall be used for sustainable projects or programs that will benefit the country,

(2) Less/(Add) the net increase/(decrease) from August 18, 2023 to the date of the bank?s report of the required reserves against a week ago level of the reservable liabilities booked under the Regular Banking Unit (RBU); and

(3) Less/(Add) provisions for liquidity equivalent to five percent (5%) of the net increase/(decrease) since August 18,2023 in the total peso deposit liabilities referred to in item (1) above.

5. Are syndicated types of ARD financing allowed?

Yes. BSP regulations expressly state that banks may grant syndicated types of AFRD financing, either between or among themselves.

Banks that participate in such syndicated AFRD financing transactions may report compliance with the AFRD financing requirement up to the extent that eligible loans or debt instruments (see the modes of compliance discussed in item 3 above) are recorded in its books.

In the event a bank sells its exposure or participation in the syndicate to another bank, only the purchasing bank may report to sold participation as compliance with the AFRD requirement.

6. What are the penalties imposed for non-compliance with the AFRD financing requirement ?

Banks which fail to comply with the minimum AFRD financing requirement (e.g., non compliance or under compliance with the requirement, or failure to submit the required reports, or filing false reports) may be subjected to certain monetary fines and administrative sanctions by the BSP (without prejudice to any applicable criminal charges).

Similarly, directors and officers of banks that arefound to have willfully falsely certified or submitted misleading statements, or which otherwise willfully violated the implementing regulations of the Agri-Agra Reform Credit Act, may be subjected to monetary penalties, administrative sanctions, and/or criminal charges.

This bulletin was prepared by SyCipLaw's Banking, Finance and Securities Department. Reina Marie M. Cayanong assisted in the preparation of this bulletin.

For more information about the legal issuance discussed in this bulletin, please contact:
Philbert E.Varona
Partner and Head of Banking, Finance and Securities Department
+632 8982 3500
pevarona@syciplaw.com