PHL banks’ exposure to the real estate sector eases to 20%

The exposure of Philippine banks and trust entities to the property sector eased to 20.17% as of end-December last year, from 20.55% at end-September 2023, data from the Bangko Sentral ng Pilipinas (BSP) showed.

Preliminary BSP data also showed this was lower than the 20.98% ratio at the end of December 2022.

Investments and loans extended by Philippine banks to the real estate sector increased by 4.3% to P3.15 trillion as of end-December from P3.02 trillion as of end-December 2022.

“This may have to do with the expanding base of total loans that mathematically led to a smaller share of real estate loans to total loans,” Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said in a Viber message.

“The ratio also eased amid the need for banks to comply with limits on real estate loans, investments, and other related exposures, as a matter of prudence to address concentration risks on the industry,” he added.

Central bank data showed that real estate loans rose by an annual 5.8% to P2.74 trillion as of end-December from P2.59 trillion as of December 2022.

Broken down, commercial real estate loans went up by an annual 5.5% to P1.73 trillion, while residential real estate loans increased by 6.7% to P1 trillion.

Meanwhile, past due real estate loans jumped by 2.4% to P135.261 billion.

This as past due commercial real estate loans rose by 4.4% to P39.987 billion, while past due residential real estate loans edged higher by 1.5% to P95.274 billion.

Gross nonperforming real estate loans inched up by 0.5% year on year to P108.389 billion.

This brought the gross nonperforming real estate loan ratio to 3.96% as of end-December from 4.17% as of end-2022.

Meanwhile, real estate investments in debt and equity securities declined by 5.9% to P410.653 billion in the period ending December 2023.

Mr. Ricafort also noted that higher borrowing costs may have reduced the demand for new real estate loans.

“Since real estate development and purchases by buyers require relatively larger amount of capital and financing, (it’s more) sensitive to higher interest rates.”

From May 2022 to October 2023, the central bank raised rates by a cumulative 450 basis points (bps) to bring the benchmark rate to a 17-year high of 6.5%.

The BSP monitors lenders’ exposure to the real estate industry as part of its mandate to guide financial stability.

In 2020, the central bank raised the real estate loan limit of banks to 25% of their total loan portfolio from 20% previously to free up additional liquidity as part of its relief measure during the pandemic.

Separate BSP data showed that housing prices rose at a slower pace in the fourth quarter of 2023. The Residential Real Estate Price Index rose by 6.5% in the fourth quarter, much slower than the 12.9% expansion in the third quarter and the 7.7% growth in the same period a year ago.

Source: Business World

Dictionary of bank loans

Understanding the jargon of home loans can be confusing, overwhelming and a wee bit frustrating at times.

But you don’t have a choice: if you’re bent to make the most out of your loans and savings, you will need to at least make an effort to fully understand these terms commonly used by your bankers and brokers.

This way, you won’t feel cheated or forced into taking that huge leap as you work on your dream home. Remember, ignorance is not and will never be an excuse—more so in this day and age when it’s much easier to do research and look up banking jargon via the internet, whether through your laptops, tablets or even mobile phones.

In the Philippines, banks have comprehensive websites that usually contain most of the information you will need to know before taking out a loan—the products and features offered, processes involved, requirements and even definitions of some terms you have to be aware of.

Here are some of the most common terms you’ll likely come across with once you start looking for the right banking partner that will suit your loan needs.

Home Loan

A home loan refers to a sum of money borrowed from a financial institution or a bank, usually for the purpose of buying a lot, a house and lot or a condominium unit. Some institutions offer home loans that can also be used for home construction, renovations, or even for the refinancing of an existing home loan.

PRINCIPAL OF A LOAN

The principal of a loan refers to the actual amount borrowed.

INTEREST RATE

The interest rate, mainly expressed as a percentage of the principal, is used to compute the amount to be paid for the money borrowed. It can also be regarded as the “cost of borrowing” money from the bank, and depends on prevailing market rates.

Borrowers usually prefer lower interest rates, but these are offered when the repayment period is shorter.

REPAYMENT

Repayment is the “act of paying back money previously borrowed from a lender. Repayment is typically executed through periodic payments that include part principal plus interest.”

TENOR OR REPAYMENT PERIOD

Tenor commonly refers to the time or period set for the repayment of a loan or until a financial contract expires.

Usually, a shorter tenor means lower interest rates. A longer repayment period fetches higher interest rates because of the belief that there is a greater risk involved, meaning there is a bigger chance that something might go wrong i.e., borrower not being able to complete all due payments.

INTEREST FIXING PERIOD

Financial institutions offer a way to keep your investments in real estate protected via an interest fixing period. This refers to the length of time you want your interest rate to remain the same despite whatever movements the interest rate may experience in the future.

This will allow you to protect your loans from market volatility and shifts in the real estate market. If there is a hike in interest rates anytime within the interest fixing period, the rate on your loan will not be affected.

The interest rate will only be reviewed and changed when the fixing period expires.

It’s still best to consult a bank home loan expert and to do your own research about the current economic conditions before deciding on your preferred fixing period.

COLLATERAL

Collateral is defined as “a property or other asset that a borrower offers as a way for a lender to secure the loan. If the borrower stops making the promised loan payments, the lender (bank) can seize the collateral to recoup its losses.”

The documentation to satisfy the collateral requirement can be: transfer certificate of title or condominium certificate of title and tax declaration (land, improvement, or condo unit. The bank may also ask for the following to evaluate the loan: contract to sell or reservation agreement if under developer tie up; and floor plan, bill of materials, or job specifications for house construction.

LOAN FEES

Remember, the cost of borrowing money from a bank does not end with paying the interest and the principal alone. There are other minimal fees that you should be aware of as well.

For home loans, these include fees for registration, notarial charges, appraisal, title investigation, handling, mortgage redemption and insurance.

Indeed, there are no shortcuts if you intend to be a well-informed home buyer and a responsible loan borrower. A little patience to go through all these minute details might prove to be more beneficial than you think in the long run.

Source: Inquirer

Is it wise to borrow from a related party?

When operating a company, capitalization and working funds are needed for it to run properly and efficiently. One way of getting this necessary funding is through borrowings. Normally, a company will borrow from banks or any financial institution that is willing to lend, provided certain qualifications or collaterals are offered. This route, however, may take a while to get approved.

As an alternative, a company can opt to borrow from related parties that are willing to lend under more convenient circumstances, that is, without requiring collaterals or qualifications guaranteeing the company's ability to pay. These lenders instead rely on the related party relationship as assurance that the company will pay them back.

The question now is: Can interest expense be claimed as a deduction from gross income, and what are the requirements for the same to be considered deductible?

Based on the recent issuance of Revenue Memorandum Circular (RMC) 19-2024, under Section III. A1, interest paid or incurred within a taxable year on indebtedness in connection with the taxpayer's profession, trade, or business shall be allowed as a deduction from gross income, subject to certain limitations, when the following requisites, provided in Section 34(B)(2) of the National Internal Revenue Code (NIRC) of 1997, as amended, and as implemented by Revenue Regulation (RR) 13-2000 and Section 7(B) of RR 5-2-21, are met:

– the indebtedness must be that of the taxpayer;

– the interest must have been stipulated in writing;

– the interest must be legally due;

– the interest payment arrangement must not be between related taxpayers as mandated in Sec.34(B)(2)(b), in relation to Sec. 36(B), both of the NIRC of 1997, as amended;

– the interest must not be incurred to finance petroleum operations;

– the interest was not treated as "capital expenditure" if such interest was incurred in acquiring property used in trade, business, or exercise of profession; and

– the interest will be reduced by an amount equivalent to 20 percent of interest income subject to final tax; however, if the final withholding tax rate on interest income of 20 percent will be adjusted in the future, the interest reduction will be adjusted accordingly.

In addition, the taxpayer must have withheld the appropriate tax to claim the interest expense as deduction from gross income. Further, the same RMC also provides that interest expense paid on intercompany loans will not be deductible from gross income if both the taxpayer and the person to whom the payment has been made are persons specified under Section 36(B) of the NIRC of 1997, as amended.

Section 36(B) reads as follows: "(B) Losses from Sales or Exchanges of Property. – In computing net income, no deductions shall in any case be allowed in respect of losses from sales or exchanges of property directly or indirectly... (1) Between members of a family. For purposes of this paragraph, the family of an individual shall include only his brothers and sisters (whether by the whole or half-blood), spouse, ancestors, and lineal descendants...."

Based also on RR 19-2020, in determining whether a person or entity is a related party, the following will apply: A person or a close member of that person's family is related to a reporting entity if that person has control or joint control of the reporting entity, has significant influence over the reporting entity or is a member of the key management personnel of the reporting entity or of a parent of the reporting entity.

An entity is related to a reporting entity if any of the following conditions apply:

– The entity and the reporting entity are members of the same group, which means that each parent, subsidiary, and fellow subsidiary is related to the others.

– One entity is an associate or joint venture of the other entity or an associate or joint venture of a member of a group of which the other entity is a member.

– Both entities are joint ventures of the same third party.

– One entity is a joint venture of a third entity, and the other entity is an associate of the third entity.

– The entity is a post-employment benefit plan for the benefit of employees of either the reporting entity or an entity related to the reporting entity. If the reporting entity is itself such a plan, the sponsoring employers are also related to the reporting entity.

– The entity is controlled or jointly controlled by a person identified.

– A person identified has significant influence over the entity or is a member of the key management personnel of the entity (or of a parent of the entity).

– The entity, or any member of a group of which it is a part, provides key management personnel services to the reporting entity or to the parent of the reporting entity.

In all cases, the substance of relationships between entities shall be taken into account and not merely the legal form.

With the above clarifications, borrowings from a related party will not be considered deductible for purposes of income tax calculation even if all other requisites are met and even if corresponding withholding taxes are remitted to the tax office.

Although it is easier to borrow from a related party, it comes at a price: not being able to deduct the corresponding interest expense for purposes of income tax calculation. Hence, taxpayers should carefully consider their options when the need to borrow arises. For all its requirements and scrutiny, perhaps borrowing from banks and other financial institutions is the smarter move compared to knocking on the door of a related party.

Source: Manila Times