Document of

The World Bank FILE COPYFOR OFFICIAL USE ONLY

Report No. 1972-PH

PHILIPPINES

STAFF APPRAISAL REPORT

ON THE

DEVELOPMENT BANK OF THE PHILIPPINES

April 21, 1978

Projects DepartmentEast Asia and Pacific Regional Office

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

US$1.00 = P 7.40P 1.00 = US$0.135P 1 million = US$135,135P 1 billion = US$135 million

ABBREVIATIONS

ADB - Asian Development BankBAAD - Branches and Agencies DepartmentCB - Central Bank of the PhilippinesCOA - Commission on AuditCPD - Control and Planning DepartmentCSMI - Commission on Small and Medium IndustriesDBI - Development Banking InstituteDBP - Development Bank of the PhilippinesDCP - Design Center of the PhilippinesDDRB - Department of Development and Rural BanksDOI - Department of IndustryERR - Economic Rate of ReturnFCDUs - Foreign Currency Deposit UnitsFRR - Financial Rate of ReturnFTI - Food Terminal IncorporatedIGLF - Industrial Guarantee and Loan FundIPD - Industrial Projects DepartmentIPG - Industrial Promotion GroupLBP - Land Bank of the PhilippinesMASICAP - Medium and Small Industry Coordinated Action ProgramNACIDA - National Cottage Industries Development AuthorityNBFI - Non-Bank Financial IntermediariesNCSO - National Census and Statistical OfficeNEDA - National Economic Development AuthorityNHC - National Housing CorporationNSC - National Steel CorporationOBUs - Off-Shore Banking UnitsPDBs - Private Development BanksPD - Presidential DecreePDCP - Private Development Corporation of the PhilippinesPEG Project Evaluation GroupPID - Project Investment DepartmentPISO - Philippine Investments Systems OrganizationPNB - Philippine National BankPSG - Project Supervision GroupSBAC - Small Business Advisory CenterSMI - Small and Medium IndustriesSSE - Small Scale EnterpriseTAC - Trade Assistance CenterUPISSI - University of the Philippines Institute for Small Scale

Industries

FOR OFFICIAL USE ONLY

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FISCAL YEAR

July 1 - June 30 (up to June 30, 1976)July 1, 1976 - December 31, 1976 (interim)January 1 - December 31 (from January 1, 1977)

This document hs a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

PHILIPPINES

DEVELOPMENT BANK OF THE PHILIPPINES

STAFF APPRAISAL REPORT

TABLE Of CONTENTS

Page No.

BASIC DATA (i)-(ii)

1. THE INDUSTRIAL SECTOR .. 1

Recent Developments. 1Structure of Manufacturing Industry . . . . . . . . . . . . 1Industrial Investment 3. . . ... 3Industrial Sector Issues and Policies . . . . . . . . . . . 4Prospects.. 6

2. THE SMALL AND MEDIUM INDUSTRIES (SMI) SECTOR . . . . . . . . 6

The Role of SMI in the Manufacturing Sector . . . . . . . . 6Institutional Framework for Assistance to SMI . . . . . . . 10Prospects for SMI .. 12

3. THE FINANCIAL SECTOR . . . . . .. .. 13

Overview . . . . . . . . . . . . . . . . . . . . . . . . . 13Profile of Financial Institutions . . . . . . . . . . . . . 14Financial Markets . . . . . . . . . . . . . . . . . . . . . 15Recent Developments . .. . . . . . . . . 16Financial Sector Issues .. 18

4. THE DEVELOPMENT BANK OF THE PHILIPPINES (DBP) . . . . . . . . 19

A. Institutional Aspects. . . . 19Legal Framework and Ownership . . . . . . . . . . . . 19Organization, Management and Staff . . . . . . . . . . 19Operating Policies and Development Strategy .... 23Project Appraisal and Supervision . . . . . . . . . . 24Procurement and Disbursements. . . . . . . . . . . . . 26Internal Reporting . ... . . 27

B. DBP's Role in the Economy . . . . . . . . . . . . . . . 27DBP in Perspective .. .. 27Economic Impact ... 28

This report was prepared by Messrs. Khalid Siraj, Benjamin Cu Kok,Maurice Joyce and Aswin Kongsiri (Consultant) following theirvisit to the Philippines in October 1977.

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Page No.

C. Operations .... . . . . . . . . . ... ... . . . . . 31

Overall Financing Operations . . . . . . . . . . . . . 31Industrial Lending Operations . . . . . . . . . . . . 32Features of Industrial Loans . . . . . . ... . . 33SMI Lending Operations . . . .. 34

Agricultural Lending Operations . . . . . . . . . . . 36Real Estate and Community Development Lending . . . . 36

Private Development Banks Financing Program . . . . . 36Equity and Securities Investments . . . . . . . . . . 37

Guarantee Operations .. 38Other Operations . . . . . . . . . . . . . . . . . . . 38

D. Financial Condition, Financial Performance and Quality ofPortfolio . . . . . . . . . . . . . . . . . . . . . . . 38

Financial Condition .38Financial Performance .40Audit .41Reserves Policy and Position . . . . . . . . . . . . . 41Portfolio Quality ... . . . . . . . . . . . . . . . 42

E. Prospects .... . . . . . ..... . . . . . . . . . 45Business Prospects and Projected Operations . .45Resource Requirements. . . . . . . . . . . . . . . . . 46Financial Projections .. 47

5. CONCLUSIONS AND RECOMMENDATIONS . . . . . . . . . . . . . . . 48

Objectives of the Proposed Loan . . . . . . . . . . . . . . 48Justificaton of the Loan . . . . . . . . . . . . . . . . . . 49Features of the Loan .49Agreements and Understandings Reached at Negotiations . . . 52

Recommendations . . . . . . .. 53

LIST OF ANNEXES

1. Board of Governors as of September 30, 19772. Statement of Operating Policies and Procedures for Medium and Large-Scale

Industrial Financing3. Outline of Industrial Development Strategy for 1978/794. Supporting Tables and Charts

T-1 Comparative Data on Manufacturing Sector by Size of Establishment,1971 and 1974

T-2 Present and Projected Staffing PositionT-3 Characteristics of Subprojects Financed Under IBRD Loan

No. 998-PHT-4 Characteristics of Subprojects Financed Under IBRD Loan

No. 1190-PH

T-5 Features of SMI Subprojects Financed Under IBRD LoanNo. 1120-PH by Regions

T-6 Features of SMI Subproject Financed Under IBRD LoanNo. 1190-PH by Regions

T-7 Summary of Operations, January 1, 1947-June 30, 1977T-8 Characteristics of Loans Approved January 1, 1947 to

June 30, 1977T-9 Characteristics of Industrial Loans Approved, FY73 to FY77T-10 Distribution of Industrial Loans Approved by Purpose, FY73

to FY77T-11 Summary of Home Industry and SMI Loan Approvals, FY74-77T-12 Characteristics of SMI Loans by Regions, Size of Loans,

and Purpose, FY74-77T-13 Characteristics of SMI Loans by Industry, FY74-77T-14 Characteristics of SMI Loans Approved in FY1976 and FY1977

by Nature, Size of Borrowers' Assets and Duration of LoansT-15 Summarized Balance Sheets, June 30, 1973-1977T-16 Summarized Income Statements, FY73-FY77T-17 Analysis of Loan Portfolio as of June 30, 1977T-18 Analysis of Home Industry and SMI Loan Portfolio as of

June 30, 1977T-19 Projected Approvals, Commitments, and Disbursements, CY1977-82T-20 Past and Projected SMI Loan Approvals, CY1976-82T-21 Long-Term Resource Position as of June 30, 1977T-22 Projected Income Statements, CY1977-82T-23 Projected Balance Sheets, CY1977-82T-24 Projected Cash-flows, CY1977-82T-25 Schedule of Projected Draw-Downs from the Proposed Bank Loan of

$80 millionC-1 Organization Chart, October 1, 1977 (No. 18362)

5. Selected Data and Documents Available in the Project File

MAP

No. 13448 Map Showing Location of DBP's Offices

PHILIPPINES

DEVELOPMENT BANK OF THE PHILIPPINES

Basic Data

1. Year of establishment: 1958 /a2. Ownership: 100% owned by the Government of the Philippines3. Status of IBRD loans (as of February 28, 1978):

Date Rate of Loan Out-Project Loan No. signed interest amount Committed Disbursed standing

(%) -------------US$ million--------------

Grain processing I 720-PH 02/04/71 7.25 14.3 14.3 9.9 8.1Livestock I 823-PH 05/25/72 7.25 7.5 7.5 7.5 7.5Fisheries I 891-PH 05/21/73 7.25 11.6 11.6 10.5 10.5Industrial development

and tree farming 998-PH 06/12/74 7.25 50.0 48.5 42.6 42.6Interisland shipping 1048-PH 10/29/74 8.0 20.0 13.8 4.9 4.9SMI 1120-PH 06/05/75 8.5 15.0/b 15.0 15.0 15.0Industrial development 1190-PH 01/28/76 8.5 75.0 48.8 18.7 18.7Livestock II 1225-PH 04/08/76 8.5 20.5 16.2 8.1 8.1Grain processing II 1269-PH 07/02/76 8.5 11.5 - - -Fisheries II 1270-PH 07/02/76 8.5 12.0 1.8 1.8 1.8Tree farming II /c 1506-PH 01/23/78 7.9 8.0 - - -

4. Operations (P million):

CumulativeJan. 1, 1947-

FY74 FY75 FY76 FY77 June 30, 1977Loans

ApprovalsAgricultural loans 120.4 550.5 840.9 510.3 3,142.5Industrial loans 94.9 750.0 1,080.4 1,079.4 5,614.8Real estate loans 33.7 1,057.4 448.0 294.6 2,509.5Others 44.0 72.9 107.9 129.3 755.2

Total approvals 293.0 2,430.8 2,477.2 2,013.6 12,022.0

Disbursements 330.5 940.0 2,768.8 2,497.9 n.a.

Investments 58.8 147.9 120.3 92.3 n.a.

GuaranteesApproved 2,760.0 811.2 1,354.2 978.9 14,371.5Issued 1,754.2 925.9 1,205.0 931.6 13,460.1

/a DBP is a successor to the post-war Rehabilitation Finance Corporation, set up in 1947./b Amount of DBP component of the loan; the total amount of the loan was $30 million./c Not yet effective.

( ii)

5. Interest Rates and Charges:

Interest Rates /a(a) Loans of P 5,000 and below 12% p.a.(b) Loans above P 5,000 12% p.a. on loans secured by land

14% p.a. on loans not secured by land(c) Loans to PDBs 10% p.a.(d) Government loans 12% p.a.(e) Sale contracts 14% p.a.

Service Fee 2% p.a. on loans above P 150,000

Commitment Charge 0.25% per month on the undisbursed amount

Penalty Charge 3% per month

Guarantee Fees(a) Issuance letter fee 1.5% of the guaranteed amount(b) Commitment charge 1.5% p.a. on amount not availed of(c) Rate on guarantees availed

of and outstanding 3.0% p.a.

Preferred Shares 14% p.a.

6. Financial Position (P million):

June 30 _ 1974 1975 1976 1977

Total assets 5,279.4 7,837.9 11,087.7 14,291.3Long-term portfolio 3,214.3 4,198.7 6,980.9 8,985.9Total liabilities 3,304.1 5,762.1 8,815.3 11,421.6Long-term liabilities 2,400.8 4,303.8 6,525.0 8,879.5Shareholder's equity 1,975.3 2,075.8 2,272.4 2,869.7Current ratio 1.2:1 1.4:1 1.0:1 1.2:1Debt /b/equity ratio 3.2:1 4.5:1 5.6:1 5.5:1Reserves and provisions

as % of portfolio 7.5% 7.4% 5.2% 5.0%

7. Financial Performance (P million):

FY74 FY75 FY76 FY77

Gross income 443.8 580.9 813.7 999.2Interest income 280.5 267.6 401.3 620.2Financial expenses 254.2 339.4 540.8 727.5Income before taxes andprovisions 126.0 112.1 128.9 94.8

Net income 90.8 71.4 84.7 82.3Income before tax and

provisions as % of averagetotal assets 2.5% 1.7% 1.4% 0.8%

Net income as % of averageequity 4.8% 3.5% 3.9% 3.2%

Financial expenses as % ofaverage total assets 5.2% 5.2% 5.7% 5.7%

Administrative expenses as% of average total assets 1.3% 2.0% 1.5% 1.4%

/a Foreign currency loans are made at the same rates, but they carry foreign exchange risk./b Including guarantees outstanding.

PHILIPPINES

DEVELOPMENT BANK OF THE PHILIPPINES

STAFF APPRAISAL REPORT

1. THE INDUSTRIAL SECTOR

Recent Developments

1.01 The industrial sector /1 grew rapidly in the fifties as theGovernment's import substitution policy led to a significant replacement of

imports by domestic production. This was followed by a period of slowergrowth until the economy started picking up again in 1972. As a conse-

quence of the 1974 recession industrial growth rates plummetted; the growth

rate of gross value added at constant prices in the manufacturing sector

dropped from 13.9% in 1973 to 4.8%, 3.5% and 5.8% in 1974, 1975 and 1976respectively.

1.02 The manufacturing sector is the second largest sector in the

economy accounting for 24.6% of GDP in 1976, absorbing about 30% of fixed

investment and contributing 10.9% of the total employment. The mining

sector was stagnant over the period 1973-76, and comprised only 1.4% of GDPin 1976 mainly because of the low world market price of copper. Several new

mining projects based on chromite, copper, nickel and gold are being undertaken.These are projected to raise the annual growth rate of the mining sector to

9% over the five years between 1978 and 1982. The construction sector has

grown rapidly in the recent past, with construction GDP doubling between 1974and 1976. The Government's five-year plan projects construction GDP toincrease further by 60% by 1982.

1.03 Preliminary estimates for the first half of 1977 indicate that

manufacturing output in physical terms grew by 4.7% as against 4.4% during

the same period in 1976. The major growth industries in 1977 were: textilesand wearing apparel, chemicals, petroleum, base metals, fabricated metalproducts and machinery and equipment.

Structure of Manufacturing Industry

1.04 Sectoral Composition. The sectoral composition of manufacturingsince 1970 is shown below:

/1 The industrial sector includes mining, manufacturing, construction

and utilities.

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SECTORAL COMPOSITION OF MANUFACTURING(Value added in P million at constant 1972 prices)

1970 1973 1976Value Value ValueAdded % Added % Added %

Consumer Goods 6,379 53.9 7,669 50.3 9,184 52.5Food 3,552 30.0 3,871 25.4 4,558 26.0Beverages and tobacco 1,393 11.8 2,049 13.4 2,415 13.8Textiles, apparel and leather 1,172 9.9 1,410 9.3 1,756 10.1Printing and publishing 262 2.2 339 2.2 455 2.6

Intermediate Goods 4,159 35.2 6,174 40.4 6,577 37.6Paper and paper products 341 2.9 420 2.8 538 3.1Wood and cork products 497 4.2 627 4.1 558 3.2Chemicals and rubber products 1,096 9.3 2,232 14.6 2,694 15.4Petroleum 858 7.3 1,358 8.9 1,134 6.5Non metallic mineral products 495 4.2 597 3.9 613 3.5Basic metals and metalproducts 872 7.3 940 6.1 1,040 5.9

Durable and capital goods 1,029 8.7 1,143 7.6 1,443 8.2Machinery 532 4.5 582 3.9 589 3.3Transport equipment 497 4.2 561 3.7 854 4.9

Miscellaneous 256 2.2 266 1.7 297 1.7

Total 11,823 100.0 15,252 100.0 17,501 100.0

Although manufacturing value added grew by an average annual rate of 6.8% overthe period 1970-1976 the relative sectoral share did not change significantly.During the first half of the period intermediate goods increased their shareof total value added at the expense of consumer goods, but this trend was soonreversed. The major growth industries were chemicals and rubber products(16.5%), beverages and tobacco (9.6%), printing and publishing (9.6%), andtransport equipment (9.6%).

1.05 Export Performance. After slow growth in the 1960's, manufacturedexports grew rapidly in the early 1970's partly as a result: of several exportpromotion measures adopted by the Government. The share of manufacturedexports to total exports grew from 49% in 1973 to 59% by 1976. While tradi-tional exports such as sugar, coconut products, plywood and veneer facedslack export demand and low prices, there was a rapid increase in

nontraditional manufactured exports such as garments, handicrafts andelectronic products, which grew at an annual average growth rate of 33% overthe period 1973-77./i

1.06 Ownership Size and Value Added. The industrial sector is predomi-nantly privately owned and concentrated in large capital intensive units.In 1974, organized manufacturing units with over 200 employees representedonly 4% of the total number of registered enterprises but accounted for over60% of total manufacturing employment and 78% of value added (Annex 4, T-1).An estimated one million workers operate in unregistered enterprises employingless than five people.

1.07 Employment Performance. Except for the last two years, the indus-trialization process has done little in terms of employment creation.Between 1960 and 1971, employment in manufacturing grew at an annual rate ofabout 2.5%, fell to zero growth between 1971 and 1974 but rose sharply in1975 (7.6%) and 1976 (8.4%). The greater employment generation in 1975-76resulted, in part, from the high priority given by the Government to thedevelopment of labor intensive small and medium scale industries./2

1.08 Regional Distribution. Manufacturing enterprises tend to beconcentrated in Metro-Manila and adjoining provinces. In 1974, Metro-Manila accounted for 39% of all manufacturing establishments employingmore than 5 people; 59% of total industrial employment; 49% of gross valueadded, and 43% of total fixed assets. If adjoining provinces are alsoincluded, these percentages would rise by a further 20-30%. The concentra-tion of industry in and around Manila has lessened in recent years; 42% oftotal BOI projects approved before December 1975 were located in the MetroManila area /3 while the comparable figure for 1976 was 32%. DBP lendinghas followed the same trend with the share of industrial lending in Maniladecreasing from 35.2% in FY74 to 23.4% in FY77 (para. 4.39).

Industrial Investment

1.09 Capital expenditures in the manufacturing sector in 1975 increasedby 27% reflecting decisions to expand capacity taken in 1973 and 1974. From1975 onwards, however, the level of new investment declined as a consequence ofthe 1974 recession. This was reflected in a drop in new projects registered withthe BOI from 217 in 1974 to 152 in 1975 and 86 in 1976. Simultaneously, thenumber of newly registered business organizations fell from 49,367 in 1974 to31,136 in 1975 and 30,813 in 1976. For a brief period between March and May 1976,

/1 For a detailed discussion of nontraditional exports see IBRD ReportNo. 1765-PH, The Philippines Country Economic Memorandum, October 26,1977, Annex A.

/2 Philippine small and medium industries sector is reveiwed in paras.2.01-2.15.

/3 In the districts of Batangas, Cavite, Laguna, Quezon and Rizal.

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investment expectations rose as the business community perceived signsof recovery in the U.S. and Japanese economies (based on economic datareleased in the first quarter). However, it later became clear that theWorld wide recovery would be slower than expected. GrowthL of expenditureson durable equipment in the manufacturing sector fell to 5% in 1976 (from27% in 1975) and is not expected to have grown significantly in 1977.

Industrial Sector Issues and Policies

1.10 Development Objectives. In its five-year plan, the PhilippineGovernment has set as objectives for industrial growth, employment generation,increased net foreign exchange earnings and greater self-reliance in commoditysupply. The generation of employment opportunities is probably the highestpriority./l The estimated growth in the labor force over the next decade is3% p.a., and this means that the economy will have to employ annually almost500,000 new entrants into the labor force over this period. Because theagricultural sector is likely to provide fewer new jobs annually than in thepast, the provision of more work opportunities in the manufacturing sectoris crucial. This employment growth can be fostered through developingfurther exports of labor-intensive nontraditional manufactures, reviving andsustaining growth in the labor-intensive modern small and medium-industriessector, and expanding the domestic production of intermediate goods throughimport susbtitution. At the same time as employment generation is pursued,there is also a need for investment in a few large capital intensive projectsto deepen the industrial structure and to develop further the country'snatural resources. An example of such a project is the planned constructionof a copper smelter to process copper concentrates that are currentlyexported.

1.11 Investment Incentives and Employment Creation. Until recently theincentive system has favored capital rather than labor intensive technology.Over the period 1970-1971, 80% of the total estimated amount of tax reliefenjoyed by 301 BOI approved projects was on account of capital-favoring

incentives. These incentives include: exemption from import duties onimported capital equipment, double depreciation allowances on capitalinvestment, and the provision of investment funds at low or even negativereal rates of interest. Recently, there have been attempits to counteractthis bias by introducing incentives to encourage labor intensive technology.A review of the entire incentive framework is currently being undertaken bythe Government.

1.12 Export Potential and Promotional Policies. Historically, theexport of primary goods has been the major source of foreign exchange for

the Philippines. Manufactured exports (except the traditional agriculture-based exports), on the other hand, did poorly until 1970 because of an over-valued exchange rate and protectionist fiscal policies. To encourageexports the Government established a realistic (flexible) foreign exchange

/1 A broad growth strategy for Philippine industry is described in the

I.B.R.D. Economic Report, The Philippines: Priorities and Prospectsfor Development, June 1976.

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rate, fiscal incentives /1 for export promotion and an export processingzone. As a consequence, nontraditional manufactured exports grew from a low$94 million in 1970 to $545 million in 1976.

1.13 To maintain the rapid growth of nontraditional manufactured exports,credit agencies have been asked to give particular attention to financingexport industries. The Government has also set up an Export Council,comprising both public and private representatives, to consider other waysof promoting exports. In addition to these incentives the Government willhave to review its tariff policies if exports are to be further encouraged.

1.14 Import Substitution and Tariff Reform. The present tariff structureprovides relatively high protection for import substituting consumer goodsindustries and little or no assistance to producer goods and export industries.Hence few intermediate goods and industries have been developed and thosethat have often produce low quality output. The Government recognizes theimportance of consistency between the tariff structure and other investmentincentives, for balanced industrial development. Consequently, NEDA hascommissioned a comprehensive study, financed by the Bank,/2 to quantifythe effects of tariffs, quantitative restrictions, and other tax incentives,and to recommend appropriate policy changes.

1.15 Regional Dispersion of Industry. As outlined earlier, manufac-turing activity in the Philippines is heavily concentrated in the Metro-Manila area and its surrounding provinces. Recently the Government hasundertaken several steps to create conditions for more geographicallybalanced growth of industry. These measures have probably contributed to theincreasing dispersal of industry outside Manila as reflected in the figuresgiven in para. 1.08. However, their exact impact cannot be readily quantified.

1.16 An absolute condition for investments to be directed into desiredlocations is the provision of adequate supporting infrastructure and theavailability of qualified labor. Fiscal incentives without such infra-structure are unlikely to induce many new investments in the outer provincesand, with such infrastructure, may not be needed to a large extent. TheGovernment has launched several programs designed to improve the basic infra-structure in areas outside Manila (such as substantial electricity generationprojects in Mindanao and the Visayas, road construction, and a 10-yearshipping and shipbuilding program). These efforts should be continued andextended to other types of infrastructure as well as to other regions. Topromote the creation of other areas of industrial concentration away fromManila, the Government in recent years has put considerable emphasis onplanning and promoting the establishment of industrial estates and exportprocessing zones in a few selected growth centers. Eight estates areplanned by the Government to be operating or to have feasibility studiescarried out by 1982. There may also be additional privately operatedestates.

/1 Export Incentives Act (1970).

/2 Under Loan No. 1374-PH for the Third Education Project.

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Prospects

1.17 The manufacturing sector is estimated to have grown by 4.6% in 1977.The increase in consumption and investment projected for 1978 is likely toprovide the manufacturing sector with a further impetus. Over the medium-term the Government will be encouraging labor intensive export industries.Capital intensive projects will also have to be undertaken to bring aboutgreater vertical integration and increase the domestic value added inprocessing the country's raw materials. According to the recently published"Five-Year Philippine Development Plan 1978-1982," manufacturing is expectedto grow at an annual rate of 9% over this period. To achieve this target,investment over the five year period will have to grow by 15.5% p.a. for atotal P 86 billion; approximately 65% of this investment will go to largerindustries. NEDA has projected that nontraditional exports will grow by26.8% p.a. over the next ten years as compared to a growth rate for totalexports of 18.8%. Industries with significant export potential includetextiles, apparel, leather goods, handicrafts, electronics, chemicals, andgoods manufactured from nickel, copper and aluminum.

2. THE SMALL AND MEDIUM INDUSTRIES (SMI) SECTOR

The Role of SMI in the Manufacturing Sector

2.01 Cottage Industries. The latest Annual Survey of Manufacturers(ASM) /1 covered 10,742 manufacturing establishments in 1974. Most (73%)establishments surveyed were cottage industries (5-19 workers /2) andwere engaged in food processing, clothing, footwear, furniture andhandicrafts. They employed about 13% of the manufacturing labor force butcontributed only 2.5% to gross value added. However, as the ASM data do notcover establishments with fewer than five workers the share of cottageindustries in manufacturing employment and value added is likely to beconsiderably understated by the above figures. In 1975, 71,000 cottageindustries were registered with the National Cottage Industries Development

/1 ASM is a nationwide sample survey undertaken by the National Census andStatistical Office (NCSO) in every year except 1967, 1972 and 1975 whenthe Census of Establishments was undertaken. The report on 1975 censusof establishments is not yet ready.

/2 The NCSO has classified the size of industrial establishments accordingto the number of employees. For purposes of this report establishmentsemploying 20-99 workers are classified as small industry, those employing100-199 workers as medium industry, and those employing more than 200workers as large industry. This classification has been found to corres-pond fairly well with the "official" classification based on fixedassets whereby enterprises with assets of P 100,000 to P 1.0 million aretermed as small industries and those with assets of over P 1.0 million toP 4.0 million as medium industries.

Authority (NACIDA). It is estimated that they provided direct employment

for over 230,000 workers and indirect employment for a further about 890,000workers. Based on these figures, the share of cottage industries in manufac-

turing employment would rise to about 75%, and in manufacturing value added toabout 8%, or close to the unofficial estimate of 75% and 10% respectivelymade in 1973./l

2.02 Size of SMI Sector. Establishments with more than 20 workersaccounted for 27% of the units covered by the 1974 ASM and these establish-ments comprise the modern manufacturing sector (Annex 4, T-1). In 1974small-scale firms accounted for 70% of the total number of firms in themodern manufacturing sector, 10% of total employment and 10% of value added.Similarly, small and medium industries together accounted for 84% of modernmanufacturing firms, employed 31% of the labor force and contributed 20% togross value added.

2.03 Pattern of SMI Growth. In the mid-1960s there was a rapid growthin SMI measured in terms of employment and value added. From 1968-71the employment and value added generated by small scale industry actuallydeclined at an average annual rate of 6.5% and 2.7% respectively. Duringthis period, however, medium-scale industries experienced a modest growth.From 1971-74 a more balanced growth was achieved between SMI and largeindustry resulting in an overall average annual growth rate for the manu-facturing sector of 7.9% as shown in the following table.

AVERAGE ANNUAL RATES OF GROWTH IN MANUFACTURING,1962-68, 1968-71 and 1971-74

(Based on 1965 constant prices)

Establishments Employment Gross Value Added

Scale 62-68 68-71 71-74 62-68 68-71 71-74 62-68 68-71 71-74

Small 0.5 -8.0 14.2 2.2 -6.5 15.0 4.2 -2.7 7.1

Medium 3.0 1.5 10.8 2.9 1.6 10.2 10.0 1.1 4.7

Large 1.0 3.3 6.0 -0.7 5.6 7.3 0.7 10.8 8.9

Total 0.8 -5.0 12.3 0.2 2.8 8.9 2.0 7.8 7.9

2.04 Regional Distribution of SMI. Manufacturing activity has alwaysbeen concentrated in the Metro-Manila area and the adjoining provinces ofCentral and Southern Luzon (para. 1.08). SMI tend to concentrate in ornear urban areas, where they are close to sources of supply of raw materials,

/1 This estimate was made by the ILO employment mission in the report (theRanis mission) Sharing in Development: a Program of Employment, Equityand Growth for the Philippines, (1974).

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spare parts and marketing outlets. In 1974 an estimated 70% of SMI estab-lishments were located in the Central Luzon and Southern Tagalog regions

compared with about 74% in 1971. Unlike SMI, cottage industries tend to bemuch more widely dispersed. Based on the results of the 1972 Census of

Establishments, about 41% of cottage industries, by number, accounting for

about 45% of employment and 51% of value added, were located in CentralLuzon and Southern Tagalog regions. Cottage industries are estimated to

employ on average about four contractual workers for each permanent employee

and are thus an important source of off-season employment in the ruralareas. These industries also provide an important source of entrepreneursand semiskilled and skilled labor for the development of regional SMIs.

2.05 Role of SMI by Major Industry Groups. Whereas the modern manufac-turing sector in terms of employment and value added concentrates on theproduction of consumer goods (para. 1.04), the impact of SMI is greatestin the production of intermediate goods. In 1974, SMI accounted for 40% ofemployment generated in the production of intermediate goods and 29% of the

value added; comparable figures for the consumer goods inclustry were 24%and 13% respectively. The industries in which SMI accounted for over 50% ofemployment in 1974 were: furniture, leather products, metal products,machinery and miscellaneous industries. In addition, SMI accounted for 49%of employment in the footwear and apparel industry.

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SHARE OF TOTAL MODERN MANUFACTURING EMPLOYMENT AND GROSSVALUE ADDED IN SMI BY MAJOR PRODUCT GROUP, 1968-74 /a

(percentages)

Employment Gross value added1968 1971 1974 1968 1971 1974

Consumer Goods 27 20 24 17 12 13Food 25 17 25 16 9 14Beverages 17 13 15 12 9 7Tobacco 10 8 11 2 2 4Textiles 10 11 13 10 12 13Footwear and apparel 55 39 49 54 35 n.a.Furniture 73 67 75 77 60 68Printing 56 54 62 41 44 46Leather 100 100 84 100 100 n.a.

Intermediate Goods 39 35 40 34 32 30Wood and cork 35 24 35 36 25 39Paper 50 44 36 45 46 17Rubber 27 33 32 16 19 16Chemicals 41 42 38 34 36 33Petroleum and coal 30 37 39 20 34 25Nonmetallic minerals 26 15 18 16 7 9Basic metals 42 35 32 35 30 28Metal prodcuts 41 48 70 42 40 75Miscellaneous 91 77 74 91 84 64

Capital Goods 49 39 33 36 26 25Machinery 80 72 53 76 54 26Electrical machinery 43 34 28 36 23 29Transport equipment 45 35 26 37 24 12

/a Where the data available are only partially broken down by size ofestablishment estimates have been made.

2.06 Factor Proportions and Productivity in SMI. Between 1971 and 1974SMI have become more labor-intensive relative to large industries. Theamount of capital employed per unit of labor in small firms (P 11,800 perworker) was about 45% of that for large firms (P 26,200 per worker) in 1974compared with 51% in 1971./i The share of SMI contribution to value addeddeclined slightly between 1971 and 1974 while the manufacturing employmentgenerated by SMI rose from 27% to 31%. Consequently, the labor productivity

/1 The figure used for capital, fixed assets at book value, is likely tounderestimate the real value of inventories; however, the ratios usedgive a reasonable estimate of trend between years and the relativeposition of the various size groups.

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growth in small firms was slower than in the large firms. In 1971 and 1974SMI had lower average wage rates but a higher percentage of wages to gross

value added than large scale industry. However the share of wages in valueadded declined quite sharply for all sizes of industry, owing to a generalincrease in the capital-intensity of the manufacturing sector.

FACTOR INTENSITY AND PRODUCTIVITYIN MANUFACTURING,

1971 and 1974

Capital Output OutputLabor Capital Ratio Labor

Scale 1971 1974 1971 1974 1971 1974(P 000/worker) (P 000/worker)

Small 11.4 11.8 1.1 1.4 12.3 16.6

Medium 14.0 19.8 1.4 1.4 19.6 28.6

Large 22.3 26.2 1.0 1.5 22.0 38.2

All firms 19.6 22.7 1.0 1.5 20.2 33.0

Capital = fixed assets at book value (current prices)

Output gross value added (current prices)

Labor = total number of workers employed

2.07 In 1971 it was observed that SMI used capital more efficiently than

large industry; medium sized firms being the most efficient. The situationhas changed with the output/capital ratio of large firms increasing from1.0 (1971) to 1.5 (1974); small firms from 1.1 to 1.4; and of medium firms

remaining constant at 1.4. The improved capital efficiency of small firmsmight indicate that they have tended to develop in areas where they have themaximum comparative advantage.

Institutional Framework for Assistance to SMI

2.08 A Commission on Small and Medium Industries (CSMI) has been createdin the Department of Industry (DOI) to promote and assist the growth of SMIand to coordinate the programs of both Government agencies and Government-supported institutions for assisting small entrepreneurs. Twelve agenciesare currently represented on the CSMI. However, the member agencies continueto operate under their own budgets which are often subject to other constraints.This has prevented the CSMI from playing a more active role in program formu-lation and implementation. In late 1977, the CSMI was attempting to get a

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budget allocation for a number of multi-agency programs related to SMIassistance. The CSMI has emphasized the importance of establishing linkswith large industries in order to encourage subcontracting and also thetransfer of technology and management skills.

2.09 Technical Assistance for SMI. As part of the overall program ofassistance for SMI, various Government agencies have programs to trainentrepreneurs to assist in project development and to provide consultancyservices. The University of the Philippines' Institute for Small-ScaleIndustries (UPISSI) has an entrepreneurship development program which focusesprimarily on entrepreneurs in the rural areas. UPISSI is also working withthe Department of Education to introduce entrepreneurial training into theschools curricula. The Medium and Small Industry Coordinated Action Program(MASICAP) of the Department of Industry assists small entrepreneurs inpreparing project feasibility studies and applying to financial institutionsfor loans. MASICAP currently has 50 field teams (118 staff) operatingthroughout the Philippines. Since its establishment in November 1973 anduntil June 1977 MASICAP has assisted 3,783 projects of which 3,079 have beenaccepted by financial institutions and 1,247 projects had funds disbursed tothem. To provide operational assistance to SMI, the Department of Industrywith the Bank's assistance /1 set up the Small Business Advisory Centers (SBACs).The SBACs, which were set up in 1975, provide managerial and technical consul-tancy services to small business enterprises. Twelve SBACs, one in eachadministrative region, are to be set up. As of June 1977, nine SBACs hadbeen established with 45 consultants, and increased by three more by the endof 1977. As of March 31, 1977, the SBACs had assisted a total of 645 clientsof which 488 were manufacturing establishments. In addition, the Departmentof Trade has organized the establishment of Trade Assistance Centers (TACs)to work in coordination with the SBACs in providing marketing assistanceto small business enterprises. As of June 1977, 12 TACs had been setup, staffed by 45 marketing coordinators. The Design Center of the Philippines(DCP) and the Food Terminal Inc. (FTI) also provide marketing-related assist-ance to SMI for product design and development, storage and distribution.

2.10 Financial Assistance for SMI. The two major sources of medium- andlong-term credit for SMI in the Philippines are DBP and Industrial Guaranteeand Loan Fund (IGLF), of which DBP is the more important. The volume of termcredit provided by both DBP and IGLF increased substantially in 1975 when theBanks first loan (No. 1120-PH) for SMI in the Philippines became available.The organization, operations and lending policies of DBP's SMI lending aredescribed in the latter part of this report. IGLF, a long-term rediscount andguarantee fund owned by NEDA but administered by the Central Bank (CB), pro-vides credit to small industries through a network of intermediary financinginstitutions. Priority is given to small businesses which do not possesssufficient collateral to borrow from other sources. IGLF's approvals amountedto 50% of DBP's SMI approvals in FY75 and 13% in FY77. This decline in IGLFoperations does not indicate a slackening of demand for credit, but weak-nesses in IGLF's set up and management which the Government is attemptingto correct. Private Development Banks (PDBs) also provide term funds forSMI. However, the PDBs' resource shortage leads them to concentrate on loans

/1 Under Loan No. 1120-PH.

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to cottage industries. Although loans (over P 50,000) by PDBs to SMI havegrown by 18% per annum over the period 1973-77, this financing covers only a

small fraction of the SMI demand for term credit. Other financial institu-tions, such as the Private Development Corporation of the Philippines(PDCP), and Philippine Investments Systems Organization (PISO) whichoperate small business programs have now been accredited by IGLF.

2.11 Short-term financing for SMI remains relatively undeveloped. Atthe end of 1974 CB introduced a preferential credit scheme under whichcommercial banks and thrift institutions could rediscount up to 80% ofshort-term loans to SMI with CB at a preferential rate of interest (5%) foronlending to SMI at 12%. However, use of this facility has been limited,because of the commercial banks' requiring first mortgages on real estatecollateral. Most SMI borrowers have already mortgaged their collateralto the term lending institution. Moreover the commercial banks tend toprefer to deal with larger clients. As the availability of short-termcredit for working capital is particularly important for SMI enterprises, CBis undertaking a study to devise ways to induce the commercial bankingsector to lend for SMI. Meanwhile, DBP and IGLF have increased theirworking capital finance to both new and existing clients.

2.12 Other Programs of Assistance for SMI. As part of its work programfor 1977 the CSMI undertook several promotional programs through itsmember agencies. These included a collective marketing scheme by the Depart-ment of Trade to enable SMI to take advantage of economies of scale inmarketing and distribution, a subcontracting promotion program by DOIand an industrial estate development program by NEDA. In line with itsincreased business orientation the CSMI has initiated two programs to encou-rage more private sector involvement in SMI development. One program isaimed at encouraging successful Manila-based business groups to invest equityand technical resources in rural SMI projects, while the other plans to findexperts in management and industry to volunteer to assist SMI as sponsor-advisers.

2.13 Research on the SMI Sector. One of the projects for which theCSMI is trying to obtain budget funds (para. 2.08) is a naLtional study onPhilippine SMI. Phase I of the study, which is based on existing sources ofdata, has already been completed. Phase II, which will be the substantivepart of the study and will be based on a nationwide survey, has been delayedowing to insufficient resources. This study, which will be the firstin-depth study of the SMI sector since the ILO mission of 1973, will formthe basis for SMI policy formulation. The Bank is planning to undertake astudy of small-scale enterprises (SSEs) in the Philippines in 1978 as part ofa research project on the role of SSEs in improving employment and earningsopportunities in urban and rural areas in developing countries.

Prospects for SMI

2.14 The data available from the Annual Survey of Manufactures permitan analysis of the performance of the SMI sector to be undertaken only

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up to 1974. As the Government's program of assistance for SMI started in1974 and began to have an impact in 1975 it would not be reflected inavailable data. However, one indicator of the success of the program isthe rapid increase in DBP's lending for SMI projects in FY75 through FY77(para. 4.41) and to some extent in IGLF's lending (para. 2.10). Judgingfrom the types of SMI projects financed by DBP and IGLF during the 1975-77period, SMI are playing an increasingly important role in consumer goodsindustries (especially food processing) serving localized markets. Theexport performance of SMI particularly in goods such as footwear, garments,furniture and handicrafts has been disappointing. The program of theDepartment of Trade started somewhat later than the other components of theGovernment's program, and has been less effective in stimulating SMI exports.The TACs have concentrated their efforts on improving the market acceptabilityof SMI in domestic markets, particularly in the high-density urban areas ofMetro-Manila and Cebu. But given the increasing emphasis on exports ofnontraditional goods, the TACs are likely to move to encourage exports.The provision of adequate infrastructure and support services for SMI hasproceeded less rapidly than other components of the SMI assistance program.The costs to SMI in the regions arising from power shortages, inadequacy ofrepair and maintenance services, delays in obtaining financial assistance,and problems in communicating with suppliers and receiving orders appearsubstantial though unquantifiable. The NEDA program to develop industrialestates for SMI is aimed at addressing these infrastructure problems. Withregard to the distortions resulting from (the Government's) industrialincentives and protection policy, the CSMI is initiating a study of measureswhich might be introduced to reduce the inequity between large industriesand SMI.

2.15 On balance, the Government's assistance program is having thedesired effect of directing SMI into areas in which they have a comparativeadvantage. The future prospects for SMI appear to be good given theimproved policy and institutional framework which now discriminates lessagainst them.

3. THE FINANCIAL SECTOR

Overview

3.01 The Philippines has a relatively well developed financial system.The core of the system is the large commercial banking sector comprisingboth local and foreign banks. Long-term finance is provided principally bytwo development finance institutions although several other types of insti-tutions also provide this type of financing to a limited extent. In late1976 Offshore Banking Units (OBUs) were established and the Governmentrelaxed some of the regulations regarding Foreign Currency Deposit Units(FCDUs). Although three stock exchanges exist, the volume traded is smalland is concentrated in a few issues. The Land Bank of the Philippines (LBP)was revitalized by the Government in 1973 to help implement the agrarianreform program. The Government has also played a major role in the develop-ment of the rural banking system.

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Profile of Financial Institutions

3.02 Commercial Banks. As of December 31, 1976, the commercial bankingsector comprised 25 privately owned domestic banks, 2 Goverrment-owned banksand 4 foreign banks. Over the last five years the assets of the commercialbanking sector have increased fourfold. The Government-owned PhilippineNational Bank (PNB) is the largest commercial bank and accounted for over 36%of the banking system's total assets in 1976. The commercial banks provide

industry with working capital and trade credits: domestic credit provided bycommercial banks during the first six months of 1977 amounted to P 40 billion.

3.03 Development Finance Institutions. The Government-owned DevelopmentBank of the Philippines (DBP) and the privately owned Private DevelopmentCorporation of the Philippines (PDCP) are the major providers of long-term

finance. As of June 1977, the total assets of DBP and PDCP were P 14.3 bil-lion and P 857 million respectively.

3.04 DBP's funds come from equity contributions by the Government,borrowings from CB, foreign exchange borrowings guaranteed by the Government,deposits primarily from the Government, internal cash generation and the saleof DBP bonds. In general, DBP securities carry low rates of interest.However, special features such as tax exemption and eligibility for reserverequirements enable them to compete with other securities.

3.05 Although PDCP is defined as an investment bank under Philippinelaw, its main business is the provision of long-term loans which accountedfor 81% of its total assets as of June 30, 1977. In addition, PDCP makesequity investments, provides guarantees, goes in for underwriting, placementof equity and debt instruments and loan syndication. PDCP's operations aremainly geared towards assisting private manufacturing enterprises. Loansfrom the Bank /1 and ADB (88%) and equity contributions (8%) are the majorsources of PDCP's funds.

3.06 The Philippine Investments Systems Organization (PISO) is aprivately owned development bank established in 1973. PISO's shares areheld by domestic investors (66%) and the Private Investment Corporation forAsia (34%). Until recently PISO was engaged in short-term money marketoperations, loan syndication and underwriting. However, if the proposedBank loan ($15 million) is made, PISO will also be providing long-termfinance.

3.07 Private Development Banks (PDBs). The 34 PDBs have been promotedby DBP (para. 4.44) in various regions to engage in the mobilization andallocation of long-term resources for small local ventures. As of December 31,1976, the total assets of PDBs amounted to about P 476 million with a savingsand time deposit base of P 271 million. As a proportion of total lending

/1 The Bank has to date made five loans to PDCP aggregating $125 million.

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amounting to P 174 million, agricultural loans accounted for about 43%,industrial loans for 33%, miscellaneous loans /1 for 24%.

3.08 Rural Banks. Rural banks are unit banks which are municipality-specific and provide short-term loans primarily to agriculture. The ruralbanking system comprises around 800 privately owned banks. At the end of1976 their total assets and deposits amounted to P 3 billion and P 850 millionrespectively. Of the loans made in 1976 by rural banks 93% were for agricul-ture, most of which were seasonal production credits. The Government hasactively encouraged the growth of rural banks by providing equity contributions,loans and technical assistance from CB, tax exemptions and special rediscount-ing schemes. As a result, the assets of rural banks have increased four-foldover the past five years.

3.09 Investment Houses. As of 1976 there were 12 licensed investmenthouses each with a minimum paid-in capital of P 20 million. Most of theinvestment houses are linked to major international financial institutionsand large local commercial banks. Currently about 80% of their revenues accruefrom money market operations with only a small proportion coming from secur-ity trading or the provision of merchant banking services.

3.10 Finance Companies. The Securities Exchange Commission has194 finance companies registered with it. Of these, the 42 largest accountfor 80% of the turnover. At the end of 1976, the finance companies had acapital base of P 713 million while assets and loans outstanding amounted toP 4.6 billion and P 3.6 billion respectively. Most of the finance companiesare subsidiaries of major commercial banks and are engaged in financing thepurchase of consumer durables, providing short and medium-term credit tolocal manufacturers and traders and in financing inventory, receivables andtransport equipment.

3.11 Other Institutions. The 10 Savings Banks and 200 Savings and LoanAssociations together control less than 2% of financial assets.

Financial Markets

3.12 The Money Market. The money market provides the mechanism throughwhich commercal banks and corporations keep their liquidity position inbalance. There are basically three sub-markets: (a) government securities;(b) interbank and (c) inter-company. The government securities market isthe principal segment, with the Government being the largest trader. Themain securities traded are short-term Treasury Bills, medium-term CentralBank Certificates of Indebtedness (CBCI's) and Treasury Notes, and long-termBonds issued by DBP. While direct trading in Treasury Bills is heavy,trading in longer term securities is mainly "indirect," i.e., the securities

/L Includes loans for commercial working capital, personal consumption,and real estate.

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themelves are not traded, they serve as collateral for "repurchase" agreements.Participation in the intercompany market is restricted to firms with primecredit ratings.

3.13 Until January 1976, money market rates were not subject to thestatutory ceilings imposed on bank deposits. Hence there was a rapid growthin deposit substitutes at the expense of traditional bank deposits. In anattempt to mobilize savings through the banking institutions, the CBraised the interest rate on savings and time deposits and regulatedyields on money market instruments. Simultaneously, the minimum denominationof deposit substitutes was raised from P 50,000 to P 200,000 for instrumentswith less than two years maturity and P 100,000 for instruments with longermaturities. In June 1977, a withholding tax of 35% on interest paid onshort-term financial instruments and 15% on savings and time depositswas introduced.

3.14 The Securities Market. An important and obvious gap in the privatefinancial system is the absence of an active equity market which results inlittle capital expansion being financed through the Stock Exchange. A supplyconstraint appears to exist in the case of equity issues as private ownersare unwilling to share control over their enterprises. In 1977, a 5%development tax was levied on closely held corporations to encourage dilutionof ownership. However, the tax may not be a sufficient i ncentive for firmsto "go public" and other measures may have to be considered to strengthen thestock markets.

Recent Developments

3.15 Interest Rate Reform. Until January 1976, the interest ratescharged by the banking system were governed by the Usury Laws which alloweda maximum nominal rate of 12% p.a. for loans secured by real estate mortagesand 14% p.a. for unsecured loans. As the discounting of interest due forup to a maximum of a year was usually applied, the banks in fact realizedan effective yield of 13.6% and 16.3% depending on the security offered.In addition, the CB allowed financial institutions to charge servicefees ranging from 0.75% p.a. to 2% p.a. on a graduated scale. In 1974,in response to tight money market conditions, interest rates on savings andtime deposits which ranged from 5-9.5% p.a. were increased to 6% and11.5% p.a. In spite of the increase in the nominal rate of interest, thereal rate of interest continued to be negative. While the banking sector wassubject to the regulations referred to in para. 3.16, the same was not true ofthe non-bank financial intermediaries (NBFI). The weighted average ratespaid to investors on comparable money market instruments were often twice ashigh or higher during 1974-75. As a result, there was a considerable flow offunds from deposits to deposit substitutes issued by both banks and NBFIs.

3.16 At the beginning of 1976, the CB enacted a series of changes ininterest rates and reserve requirements aimed at both the banking sector andNBFIs. Maximum deposit rates were increased and, for the first time, adistinction was made between short and long-term lending rates. Themajor changes enacted were: (a) ceilings on loans with maturities of more

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than 2 years were raised to 19% p.a.; (b) secured and unsecured loans ofless than 2 years continued to have a ceiling of 12% and 14% p.a. respectivelyalthough a service charge of 2-3% p.a. could be added; (c) the maximumyield on money market instruments with maturities of up to 2 years, includingall charges, was set at 17% p.a.; and (d) all ceilings on yields of instru-ments with maturities of over 2 years were removed.

3.17 In December 1977 further interest rate legislation was introduced.The major changes were: (a) the imposition of an effective interest rateceiling, exclusive of bank charges, of 12% and 14% p.a. for secured andunsecured loans with maturities of under 2 years; (b) the imposition of aneffective interest rate ceiling, inclusive of bank charges, of 19% for loanswith maturities exceeding two years; and (c) a reduction of the effectivemaximum yield, inclusive of the 35% transaction tax and bank charges, from17% to 16% on deposit substitutes with a maturity of two years or less, witha further reduction in the yield to 15% effective July 1, 1978.

3.18 As a consequence of the above legislation, the yield on depositsubstitutes has been brought more in line with that of traditional bankdeposits. This may result in a shift of resources from non-banking financialinstitutions to the banking sector. In addition, there has been an attemptto encourage investment by reducing the cost of borrowing. While the costof borrowing has been reduced there has been no corresponding adjustment inthe deposit rates paid. Consequently, the commercial banks will now beoperating on smaller spreads. The Government claims that the reduction inspreads will compel the banking sector to be more competitive.

3.19 Offshore Banking Units (OBUs) and Foreign Currency Deposit Units(FCDUs). A significant development in the Philippine banking system was theestablishment of offshore banking facilities in September 1976. The purposewas to develop Metro-Manila as a regional financial center. PresidentialDecree No. 1034 authorizes a branch, subsidiary or affiliate of a foreignbanking corporation to conduct banking transactions in foreign currenciesinvolving the receipt of funds, primarily from external sources, and thesubsequent utilization of these resources for undertakings inside or outsidethe country. The directly participating foreign banking institutions arereferred to as OBUs. As of October 31, 1977, the CB had approved of16 foreign banks operating as OBUs in the country. While offshore transac-tions are subject to few restrictions, offshore to onshore transactions haveto be licensed by CB.

3.20 A FCDU is defined as an accounting unit or department in a localbank or in the local branch of a foreign bank authorized to operate underthe expanded foreign currency deposit system. As of October 31, 1977, fourbranches of foreign banks and 13 domestic commercial banks had been author-ized to operate as FCDUs. While performing similar functions some crucialdifferences exist between OBUs and FCDUs. First, FCDUs may enter intoforeign currency-peso swap transactions with CB which OBUs are not permittedto do. Second, FCDUs are subject to a 100% foreign currency cover requirementwhich is not the case with OBUs.

3.21 Mortgage Banking. While some form of home mortgage lending isprovided by most existing private financial institutions, there is an absence

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of specialized private sector housing intermediaries. Savings and mortgagebanks which were to perform this function are unable to do so owing to theirlimited capacity to mobilize savings. This has resulted in relatively smallannual home mortgage flows and little liberalization of mortgage lendingterms. The establishment of a mortgage bank which would mobilize resourcesfor mortgage loans through the issuance of long-term mortgage bonds has longbeen advocated. Although the Government has recently responded by establish-ing the National Home Mortgage Finance Corporation, little is currentlyknown about its role in resource mobilization or the precise scope of itsoperations.

Financial Sector Issues

3.22 Aggregate savings performance in the Philippines has improvedgenerally during the last decade and is comparable to that of other countriesat a similar stage of economic development. Since 1975, gross domesticsavings have been at a level of 25% of GNP and financed approximately 80% oftotal investment. However, in order to reach a gross investment level ofmore than 31% of GNP by 1982 and reduce the country's dependence on foreignsavings, the Five Year Development Plan (1978-82) calls for an increase ingross domestic savings to a level of more than 28% of GNP at the end of thePlan period. To achieve this objective, the savings of the householdsector, which is expected to contribute approximately 40% of the totaldomestic savings requirement, will need to increase by more than 17%per annum during the next five years.

3.23 In addition to raising the level of savings, there is also a needto increase the maturity of financial assets. While the gross acquisition offinancial assets by the private sector rose from approximately 7% of GDP in1965 to over 12% in 1974, the relative share of short-term assets increasedfrom only 17% to more than 40% during the same period. This was mainly dueto statutory limits on deposit rates of credit institutions while no ceilingsexisted for money market rates. Given the long-term finance needs of theinvestment program, the present preference for financial assets with shortermaturities represents an important issue for the Government's financialpolicy. With a view to lengthening the average maturity of financial instru-ments and to encouraging the mobilization of savings through banking institu-tions, a series of measures have been taken (paras. 3.16 and 3.17). Thesemeasures have resulted in a 36% increase in real terms in savings and timedeposits in 1977. However, a 19% ceiling on loans and debt instruments witha maturity of over two years still effectively limits the rate on long-termdeposits.

3.24 The Philippine financial system has not yet developed an effectivestocks/bonds market mainly because longer term interest rates have beenstatutorily controlled. An additional constraint is the dominance of theterm market by Government financial institutions because of the preferentialtreatment given to their debt instruments. Only very limited capital expansionis being financed through the stock exchange partly due to the fact thatprivate owners are reluctant to share control over their enterprises andprefer financing through borrowing. Recently, however, a 5% development taxwas introduced on closely held corporations to encourage them to go public.

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3.25 Financial institutions and credit programs in the Philippines haveexperienced deterioration of loan recovery rates during recent years whichhas seriously affected their financial performance. This is due in part tothe rapid expansion of credit programs to the productive sectors and tointernational economic conditions which have had adverse effect on somedomestic enterprises. The Government is devoting increased attention to theproblem of arrears, so that loan recovery can be expected to improve.

3.26 The Bank attaches considerable importance to a systematic long-termplan to develop the Philippine financial sector along rational lines. Anaide-memoire focusing on the issues relating to the Philippine financialsector is being prepared which would form the basis of the Bank's continuing

dialogue with the Government of the Philippines on financial sector issues.

4. THE DEVELOPMENT BANK OF THE PHILIPPINES (DBP)

A. Institutional Aspects

Legal Framework and Ownership

4.01 Charter and Ownership. DBP was set up in 1958 under Republic ActNo. 2081 (RA 2081) as an autonomous Government-owned development bank with amandate to supply credit for reconstruction and for the development of theagricultural and industrial /1 sectors. In 1964 it was also given theresponsibility for assisting in the establishment of smaller PDBs throughout

the Philippines. DBP's authorized capital is P 3.0 billion of which P 2.6 bil-lion was paid in as of October 1, 1977. PD No. 811 issued in 1975 callsfor its authorized capital of P 3.0 billion to be fully subscribed by1981.

4.02 Board of Governors. Under its Charter (RA 2081) the overall controland direction of DBP rests with a Board of Governors comprising ninemembers, appointed by the President of the Philippines. RA 2081 requires fiveboard members including the Chairman and the chief executive officer, toconstitute DBP's top management team. In FY77, two new board members, onefull-time and one part-time, were appointed, raising the Board membership tothe full statutory strength of nine as shown in Annex 1. The present Boardincludes the Secretary of Industry and the Special Assistant to the Presidentfor Economic Affairs. The Board meets weekly and besides directing thegeneral affairs of DBP approves all new investment commitments exceedingP 150,000.

Organization, Management and Staff

4.03 Organization. DBP's present organization (Annex 4, C-1) consistsof Head Office at Manila and a network of branches (Map No. 13448). At Head

/1 Industrial sector here is broadly defined to include manufacturing,transportation, tourism, public utilities and professionalservices.

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Office the operating departments are divided into four groups each headed byone supervising Governor. A fifth group of central support departments isunder the direct control of the Chairman. In addition three other offices,Legal, Audit and the Civil Service, are linked loosely to the organizationalthough these offices are under the jurisdictional control of respec-

tive independent bodies, i.e. Department of Justice, Commission on Audit(COA) and the Civil Service Commission. In the past two years a numberof organizational changes were made to handle more efficiently the growingvolume and complexities of DBP's operations. The most significant ofthese changes was the creation of two new departments, Agriculture Plans andPrograms Department (APPD) for identifying, developing and monitoring DBP'sagricultural financing programs; and Control and Planning Department (CPD) to

strengthen further DBP's financial control, operational and financialpl4nning and information system. These organizational changes have yieldednaciceable improvement in the functioning of departments and in interdepart-mental coordination.

4.04 Organization for Industrial Lending. DBP's industrial lending andguarantee operations are handled by three Industrial Projects Departments(IPD I, II, and III). IPD I and II handle essentially loans to the manufac-turing sector, with IPD I handling large industry loans (above P 3.0 million)and IPD II dealing specifically with home industry (cottage industry) and SMIloans. IPD III concentrates on the financing of transportation, tourism,public utilities and industrial services sectors. All these three depart-ments are known to the Bank as they have been used as conduits for twoDFC loans (IPD I), two SMI loans (IPD II) and a shipping loan (IPD III).The proposed loan will be handled by IPD I (large industry component) and IPD

II (SMI component). In addition, DBP branches will also process SMI projectsunder the loan although the overall responsibility for the implementation ofthe SMI component of the loan will rest with IPD II.

4.05 The organization of IPD I has remained more or less unchangedsince 1973. An understanding has been reached between the Bank and DBPto the effect that the Project Supervision Group (PSG) which carries the dualresponsibility of project supervision and accounts servicing (disbursementsand billing) will be split into two separate groups, one each for thesefunctions; at present most of the staff time is taken by accounts servicing(para. 4.18). In the past two years a number of organizational changes havebeen made in the set-up of IPD II. The latest reorganization effected inAugust 1977 resulted in the setting up of three Project Evaluation Groups(PEGs), each responsible for evaluating projects of specific industrygroups./l Besides leading to greater efficiency resulting from industryspecialization in PEGs, the new organization provides enhanced flexibilityto IPD II in handling the branch cases./2 Subsequently, in November 1977,

/1 This reorganization incorporated almost exactly the recommendation of theBank made at the time of the appraisal of the first SMI project in 1975

(Loan No. 1120-PH).

/2 Prior to the August 1977 reorganization, all branch cases involving DBPloans of over P 150,000 were handled by one PEG which was also respon-sible for processing all applications received in Head Office for loansup to P 150,000.

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the loan implementation function was transferred from the PSG to the PEGs tohave more efficient loan disbursement and to release manpower in PSG for

substantive project supervision work. In addition, DBP has agreed to set upa separate unit in the PSG to monitor the supervision of SMI projects in theBranches; up to now IPD II has not been given any direct role in improving

the quality of Branch supervision of SMI projects. During negotiations DBP'splans to enlarge the scope of functions of the Industry Promotion Group (IPG)in IPD II were reviewed and found satisfactory. DBP has planned to assign toIPG responsibility and adequate manpower to undertake such broader functionsas planning of DBP's SMI lending program, formulating guidelines for SMIproject promotion, establishing investment priorities for SMI financing andassessing the effect of DBP's SMI lending policies.

4.06 At present, the operating core of Branch organization consists ofan Investment and Project Development Division responsible for evaluation ofprojects of all sectors and a Project Supervision and Acquired AssetsDivision responsible for supervision of all projects and acquired assets.This set-up, based on functional lines is not conducive to optimum utilizationof specialized staff expertise. To address these problems, DBP is reorga-nizing its Branches. The new organization would lead to a better utilizationof staff expertise. DBP assured the Bank that sectoral specialization, bothin terms of manpower allocation and staff qualifications, would be introducedin the PID responsible for large projects. The administrative control ofthe branches is generally satisfactory, and has become closer since thesingle Branches and Agencies Department (BAAD) was bifurcated in 1976, BAADI for Luzon branches and BAAD II for Visayas and Mindanao branches.

4.07 Management. Dr. Placido L. Mapa, Jr./l succeeded the lateMr. Leonides S. Virata in October 1976 /2 as Chairman and chief executiveofficer of DBP. The appointment of Dr. Mapa, who has considerable experiencein banking and economic management, is a clear indication of the Government'scommitment to pursue vigorously the ambitious institution building tasksintitiated by the late Mr. Virata. Dr. Mapa's performance in his first yearin office indicates that he will press ahead with these tasks as rapidly asbroader constraints permit. Dr. Mapa's leadership will be an importantfactor in DBP's attaining further improvements expected during the progressof the proposed loan. Management at the department level has remainedstable; increasing experience of department managers has mostly resulted ingradual but discernible improvements in control over operations. The secondlayer of management of IPD I which showed signs of weak supervision capabi-lity was replaced in 1977, considerably strengthening the management of thisdepartment. The department level management both in IPD II and BAAD contin-ues to remain sound. While quality of branch management continues toimprove generally, it has been constrained by manpower shortages and thelack of clear lines of communications with Head Office especially withrespect to SMI. DBP's management is aware of these problems and is takingappropriate corrective steps.

/1 Dr. Mapa, Jr. is a former Alternate Executive Director of the Bank andits present Alternate Governor for the Philippines.

/2 Mr. Leonides Virata took leave from active service in February 1976.During the intervening period DBP was headed by its Vice-Chairman,Mr. J.V. de Ocampo.

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4.08 Staffing. As of August 31, 1977, DBP's total staff numbered 3,501,distributed in a 48:52 ratio between Head Office and Branches and a 60:40ratio between professional and non-professional staff (Annex 4, T-2). DBP'sstaff increased rather rapidly by 12.1% between October 1976 and August 1977;the staff turnover rate during the same period was low (2.6% of the averagestaff). This increase notwithstanding, DBP continues to experience staffshortages, particularly in respect of the specialized technical staff.DBP's management is taking a number of measures to resolve the staffingproblems. It has budgeted for an increase of 971 staff /1 (or an increase of27.8% over the present staff) who are expected to be recruited within thenext 12 months. Until recently, the main reason for DBP's inability toattract suitable professional staff, especially technical staff, was that itssalary scales were below even those of some of the Government financialinstitutions. In December 1977, the Government prescribed a uniform andsubstantially upgraded salary scale for Government financial institutions whichshould greatly enhance DBP's ability in the future to recruit and retain highcalibre staff. Other actions being taken by DBP are: (a) streamlining ofprocedures and the organization which would make possible more efficientdeployment of the existing staff; (b) improved and intensified staff training(para. 4.12); and (c) provision of greater career advancement opportunitiesby making it easier for the technical staff to be consiLdered for supervisorypositions. These steps should ease DBP's staffing situation but will takesome time.

4.09 Staffing for Industrial Lending. Plans for augmenting IPD Istaff, discussed at negotiations in October 1975, are nlow being translatedinto action. Total department staff strength has been increased to 109 (asof September 30, 1977). With its present staff, IPD I is adequately equippedto cope with all aspects of project evaluation and supervision and should beable to handle the growing workload over the foreseeable future throughimprovements in productivity. While generally the quality of staff in IPD Iis satisfactory, most of them are relatively inexperienced. This is partlydue to the transfer of more experienced staff to strengthen other and newdepartments. However, the staff is gradually learning through experience andby attending various training programs.

4.10 As of September 1977, total staff in IPD II was 123, of whom 101were professionals; between September 1976 and September 1977 the number ofprofessional staff increased by 33%. DBP's plans for increasing staff in IPDII were reviewed during negotiations and satisfactory understandings reached.IPD II plans to increase the number of its professional staff by 40% (or 40more staff) by September 1978. The actual members will, however, be limitedto the number of new staff that it can train and absorb without impairing thequality of its operations. Furthermore, IPD II is giving priority to therecruitment of additional manpower for PSG and the IPG, whose functions havebecome of greater importance, engineers and economists.

4.11 In the Branches the staffing problem is more acute. SeveralBranches have not been able to recruit or retain engineers for their SMIoperations and have had to resort to temporary stop-gap arrangements. DBP's

/1 Of these 971 positions, 685 or 70.5% are accounted for by professionalstaff slots.

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management is aware of this problem and is formulating measures to make itmore attractive for engineers to work in the branches. The recent Governmentdecision to upgrade DBP's salary scales (para. 4.08) would facilitate DBP'sefforts in this direction. Nevertheless in the Branches where there is ahigh level of SMI lending (such as Cebu, Davao, Dagupan and Iloilo), DBP hasmaintained an adequate engineering staff for SMI. The overall quality of thestaff in the Branches appears to be satisfactory, although there are consi-derable variations from Branch to Branch. This has necessitated extensivetraining programs, discussed in para. 4.12.

4.12 Training. DBP now provides extensive on- and off-the-job trainingprograms (internal and external) for almost all cadres of its staff. InFY77 in all 26 different kinds of training programs were conducted/arranged,for 971 staff members. In addition, 16 staff members attended differentspecialized training courses held abroad. Special attention was paid to thetraining needs of: (a) staff working on SMI projects; (b) staff in theBranches; and (c) staff working on livestock and fisheries projects. DBP'sfuture training plans call for: (a) continuation of most of the existingprograms; (b) some new sophisticated special training for agricultural andindustrial projects staff; and (c) collaboration with Development Academy ofthe Philippines with a view to organizing advanced training courses for itsown staff as well as of other development institutions in the country. Thistraining strategy is quite satisfactory.

Operating Policies and Development Strategy

4.13 Operating Policies. There have been no amendments to DBP's Charterin the past three years nor to its Statement of Operating Policies and Proce-dures for Medium/Large Scale Industrial Financing (adopted under the conditionsfor Loan No. 998-PH), attached as Annex 2. The guidelines established in itsCharter and Policy Statement are augmented by specific Board resolutions. Inthe past two years, several major policy changes were introduced and wereaimed at: (a) streamlining internal operating procedures; (b) strengtheningDBP's financial management; (c) standardizing and rationalizing lending termsfor industry; and (d) liberalizing terms and conditions of DBP's small loanprograms for industry and agriculture. To a very large extent these changeshave achieved the objectives for which they were made. DBP's policy frameworkgoverning SMI operations represents a radical improvement over the set ofpolicies which were operative in late 1974 when the first SMI project (LoanNo. 1120-PH) was appraised. The new policies have significantly relaxed therequirement for collateral and debt/equity ratio, have liberalized workingcapital financing, set realistic guidelines for repayment terms includinggrace period and provided for cost overrun financing. During negotiations,DBP confirmed that henceforth it would extend its working capital financing,in cases where fixed asset financing is not involved, to all SMI projects andwould not confine it to export-oriented projects and that the SMI borrowerswill benefit fully from the liberalized policies within the limits of prudentloan evaluation criteria.

4.14 Development Strategy. DBP has formulated a statement of strategyfor industrial development in 1978-79 which was reviewed during negotiations.The agreed version of the strategy statement (Annex 3) highlights developmentobjectives that DBP hopes to achieve in the next two years. The objectives

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in respect of DBP's large industry financing operations include inter alia:(a) greater emphasis on relatively smaller and medium size industrial enter-prises; (b) intensified promotional role designed to encourage new entrepre-neurs; (c) adoption of an investment priority plan for large industries andwithin this plan selection of projects on the basis of their contributiontowards development of the country's natural resources, favorable impact onthe balance of payment position, geographical decentralization of industryand creation of new jobs at a relatively lower investment cost; (d) compre-hensive appraisal of projects seeking DBP's guarantee assistance; (e) mobili-zation of additional resources both from internal and external sources; and(f) development of staff. The main features of DBP's development strategyfor SMI are: (a) constant efforts to improve DBP's institutional set-up tomake it fully responsive to the needs of SMI projects; (b) relaxation in itsworking capital financing policy (para. 4.13); (c) adoption of an investmentpriorities plan to serve as a rational basis for project screening andselection; and (d) specific strategies aimed at achieving geographicaldispersal of SMI, optimum utilization of local raw materials, conservation ofenergy, and encouragement to export and promotion of labor-intensive industries.Finally, DBP's development strategy also aims at increasing its technicalassistance to the country's smaller development finance institutions such asPDBs.

Project Appraisal and Supervision

4.15 Project Appraisal. Since the appraisal of the most recent DFC loan(No. 1190-PH) the improvement in the quality of DBP's industrial appraisalshas been slow but steady. The training and development of new and relativelyinexperienced professional staff /1 recruited after IPD I lost its experiencedstaff to other new departments has entailed more time than was originallyexpected. Besides, the former weakness at the supervisory level, which hassince been eliminated, also contributed to the slowness oiE improvement in thequality of appraisals. Generally, the appraisal reports are comprehensive andthe methodology used is appropriate. The reports, however, are sometimesexcessively descriptive and not sufficiently analytical especially in DBP'smarket analysis. Until recently, the market work was undertaken by theBusiness Research Department, and concentrated too heavily at times on thebroader aspects of the overall market, rather than on the prospects of market-ing the output of the project under review. In an effort to improve thequality of its marketing analysis, IPD I has set up its own Marketing andEconomic Analysis Section, and this should lead to more relevant and project-oriented market evaluation. IPD I is currently giving high priority to staffingthis Section. The quality of technical analysis of projects has suffered tosome extent because of DBP's difficulty in recruiting suitably qualified andexperienced engineers. For upgrading the quality of technical evaluation, DBPhas agreed to use the services of outside independent consultants on a selec-tive basis for large and/or complicated projects, when it feels that itsin-house capability is limited. At present, DBP calculates economic rates ofreturn for projects of US$2 million and over using Bank funds; it has now agreedto calculate ERRs for all projects with DBP's involvement of over US$500,000

/1 Alout 50% of the professional staff has less than three years experienceoT project appraisal; about 20% have experience of one year or less.

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irrespective of the source of financing. DBP has also agreed that its

appraisal reports will bring out more explicitly the employment impact interms of jobs created and, in that context, it will discuss the aspects ofchoice of technology and cost per job. DBP carefully examines the environ-mental impact of its projects and takes due precautions to ensure that eachproject complies with the Government's antipollution regulations. As amatter of policy, where necessary, DBP insists that its subborrowers include

antipollution equipment and facilities under its financing.

4.16 There has been a steady improvement in the quality of SMI appraisalsdone in IPD II. Analytical techniques, such as break even and sensitivityanalysis introduced about a year ago, are now standard practice for loans overP 500,000 and the internal financial rate of return is now calculated for allloans over P 1.0 million. The quality of appraisals done in the Branches(usually for loans below P 500,000) varies widely from Branch to Branch. InJanuary 1978, DBP set up SMI Assistance Units comprising two experienced staff

members (division chief level) for each of the three major regions (Luzon,Visayas and Mindanao) to assist the Branches among other things, in upgradingthe quality of their SMI appraisal work. The recently completed project eva-

luation manual would complement these efforts. In addition, an understandingwas reached between the Bank and DBP on other specific steps to upgrade furtherthe quality of appraisals, including a more thorough treatment of working capitalrequirements, and the calculation of ERR for all SMI loans over P 1.5 million.

4.17 DBP's management has taken a number of steps /1 to streamline the

appraisal procedures in IPD II and the Branches with a view to shorteningthe processing time. These measures notwithstanding, the average processingtime for SMI loans has tended to increase on account of a rapid increase in

the volume of SMI operations and emphasis on higher standards of appraisalquality. DBP's management recognizes that loan processing time is unsatis-factory and is endeavoring to reduce it to 60 days in both IPD II and Branchesand to 30 days for IPD II to review branch cases. Reduction of SMI loanprocessing time now forms a part of DBP's development strategy. Averageprocessing time for large industry loans is reasonable.

4.18 Project Supervision. As discussed during negotiations for thesecond DFC loan, in November 1975, IPD I took steps to improve project super-vision by introducing work scheduling for systematic project visits andreviews of periodic submissions by clients. However, these measures could notbe adhered to. Consequently, supervision of large industrial loans is oftennot carried out regularly, and the objective of identifying and overcomingproject problems as they arise has not been reached. The problems withsupervision in IPD I are to some extent a function of the workload on thestaff; supervision staff are also responsible for loan servicing (disbursements,billing), limiting the time they can spend on supervision (para. 4.05).

/1 The most significant step was increase in the discretionary authorityof Branch and Department managers from P 20,000 to P 150,000.

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However, DBP's management has decided to separate the servicing and supervisionfunctions within IPD I, which, coupled with the recent clLange in the managementof Project Supervision Group (para. 4.07) would considerably ease the situation.IPD I has also prepared a supervision manual, which includes a completework program for project visits, reporting, follow-up action and feedbacksystem.

4.19 An important element of DBP's industrial loan supervision system isits representation on the Boards of client companies. Besides serving as ameans of protecting DBP's interests, this representation has the potential ofworking as an effective means of feedback. Unfortunately this mechanismhas not fully served its latter objective on account of: (a) nomination ofnon-DBP personnel; and (b) inadequate liaison between IPD I and the appointedrepresentatives. DBP management has now adopted a new policy which ensures itsrepresentation through its own staff members. Steps are also being taken toimprove coordination between IPD I and DBP's representatives.

4.20 On account of the pressing urgency for DBP to deal with a rapidlygrowing backlog of loan applications in FY75 and FY76, progress in designingand implementing appropriate systems for supervision of SMI projects was veryslow in those years. However, in late 1976, DBP's management, recognizingthe seriousness and magnitude of the problem, started taking a series ofcorrective measures. IPD II was reorganized in 1977 and is being furtherreorganized (para. 4.05) with one of the objectives being a strengthening ofproject supervision. IPD II has recently finalized an SMI project supervisionmanual which has been adopted and circulated to all the Branches. The manualis adequately detailed and comprehensively covers all aspects of projectsupervision. IPD II is also well advanced in its plans to engage the servicesof outside collection agencies to handle small accounts of up to P 2,000(over 1,100 accounts) where cost of supervision is not commensurate withexpected benefits. These efforts will improve supervision of SMI projects,but to further strengthen and intensify such efforts DBP has decided to launcha special supervision program which inter alia includes: (a) a schedule ofperiodic project visits, reporting and follow-up action; (b) greater use ofoutside agencies for handling smaller accounts; (c) special diagnosticreports on larger SMI loans in default; (d) enforcement with greater intensityof reporting requirement for all clients; (e) monitoring by IPD II of the SMIproject supervision done in Branches; and (f) regular reports to the Bank onthe progress of SMI supervision. This program was reviewed during negotiationsand is satisfactory.

Procurement and Disbursements

4.21 DBP's procurement and disbursement procedures for large industrialloans as well as for SMI continue to be satisfactory. DBP's procurementprocedures adequately ensure that purchases from its subloans are made with

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due regard for economy and efficiency. Subborrowers are required to submitat least three (normally more) proforma contracts/or quotations for theequipment being procured from two or more member countries of the Bank. Anevaluation is carried out by DBP's engineers as to whether equipment finallyselected by the project sponsor is suitable and competitively priced. Fundsare disbursed against supporting documentary evidence of purchase and/orphysical inspection by DBP staff of project's progress. DBP's procurementand disbursement performance in respect of previous industrial and SMI loans(Nos. 998-PH, 1120-PH and 1190-PH) has been satisfactory so far.

Internal Reporting

4.22 DBP's internal reporting system and quality of reports is graduallyimproving. The most impressive improvement has been shown in DBP's arrearagesreporting with recent arrears reports being increasingly comprehensive andanalytical. The recently created Control and Planning Department (CPD) iscurrently reviewing various internal reports with a view to consolidating themand making them more meaningful and comprehensive. Constant improvements inthe record keeping both at Head Office and the Branches are being made by usingbetter data processing equipment. Whereas DBP's reporting on its totality offinancial affairs and operations is very satisfactory, it needs better repor-ting on its individual financing programs. Suggestions made by the Bank toaddress this problem have been accepted by DBP's management.

B. DBP's Role in the Economy

DBP in Perspective

4.23 DBP plays an important role in the Philippine economy, being thelargest supplier of long-term credit. Over the period FY73-77, DBP's opera-tions amounted to P 15.4 billion; at the end of 1976, DBP held 11% of theassets of the Philippine financial system and was responsible for financing13% of gross fixed capital expenditure. The major proportion of DBP'sactivities are in industry where it is involved in both large undertakingssuch as mining, textiles and chemicals, and also in the financing of small-scale industry. DBP also provides loans to small farmers and its agriculturalactivities include the financing of cereals, feedgrains, food crops, live-stock, poultry and fisheries. In addition, it is engaged in financing realestate, hospitals, shipping, transport, rural banks and PDB.

4.24 As of June 30, 1977, DBP's accumulated approvals of loans, guaran-tees, and equity investments amounted to P 27.6 billion (436,000 projects).The sectoral allocation was as follows: industry (66%); agriculture (20%),real estate (10%), and other (4%). DBP plans to invest P 7.7 billion inindustry over the next five years which is equivalent to about 9% of the totalas projected in the five year plan (1978-82).

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Economic Impact

4.25 Impact of Large Industry Financing. The sheer magnitude and

diversity of DBP's operations make it a vitally important institution in

the Philippines. The absence of reliable and comprehensive data makes it

impossible to quantify this impact adequately. However, some indication can

be had by considering the loans made over the last two years by IPD I. Eighty-

five large projects were financed with a total capital out'Lay of P 2,319.4 mil-

lion /1 of which DBP's financing amounted to 37%. An estimated 15,000 jobs

were created /2 at an average cost per job of $18,000, which is lower than

the average for BOI approved projects /3. An estimated $252 million will be

generated in exports as 35 of these projects plan to export at least a partof their output. The ex-ante internal financial rate of return, weighted by

project cost, was 27%.

4.26 Economic Impact of IBRD Industrial Financing. The Bank has had

an important influence on DBP's industrial lending. DBP has received twoIBRD loans for large industrial projects./4 Details of 47 subprojectsfinanced so far under these loans are shown in Annex 4, T-3 and T-4. The

textile industry /5 has received 34% ($28.1 million) of Bank financing. The

remaining loans were evenly distributed over a range of industries. Thirty-two of the 47 projects financed estimate that at least a part of their pro-

duction will be for export resulting in foreign exchange earnings of about$217 million annually. Bank-financed projects are expecte,d to generate 9,500

jobs /6 at an estimated average capital cost/job of $27,1()0. The cost/job

varies from $80-90,000 for two synthetic yarn projects,/7 to $1,500-2,000for garment manufacture. The average cost/job has declined from $30,000for the first loan to $24,500 for the second loan./8 In terms of regional

/1 Excluding a large mining project, Marinduque Mining.

/2 This excludes refinancing where no employment is generated.

/3 The average cost per job of BOI approved projects in 1976 was $22,700.

/4 Loan No. 998-PH for $48 million was fully committed by September 1976.Loan No. 1190-PH was for $50 million of which $35.5 million wascommitted as of mid-April 1978. This loan should be fully committedby June 1978.

/5 These projects covered the whole range of textile industry and included nylon

filament yarn, polyster yarn, and both woven and knitted textiles.

/6 Plus another 5,000 seasonal jobs in a tobacco redryirLg project.

/7 Appraised in 1974.

/8 The cost per job of projects in the pipeline of the balance of LoanNo. 1190-PH is around $15,000.

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distribution, 17 projects were based in Metro-Manila, 21 in Central andsouthern Luzon and Mindanao and 7 in the Visayas, Bicol and Northern Luzon.(The remaining two projects were for overseas shipping). The economic ratesof return on subprojects ranged from 10% (sucro-chemical plant and textilemill) to 79% (footwear) with a weighted average of 29%.

4.27 Responsibility for industrial promotion rests with the BOI; DBPoperates as a financing agent within the incentive framework provided by theBOI. DBP does, however, carry out its own project appraisals using theeconomic rate of return as an indicator of the project's economic viability.Consequently, DBP's project analysis should result in a better allocation ofresources. At present DBP does not calculate the economic rate of return forall projects it finances, but it has now decided that it would do so for allprojects in excess of $500,000 (para. 4.15). This should result in an evenmore efficient allocation of resources in the future.

4.28 Impact of SMI Financing Program. In 1970, DBP launched its firstprogram to develop SMI. Between FY72 and FY77 this program financed 1,116 SMIunits to the extent of P 452 million./l Bank-financed SMI projects havegenerated an estimated investment of P 410 million (Annex 4, T-5 and T-6).A total of 410 /2 SMI projects were financed under Loan No. 1120-PH or about14% more than the 360 predicted at appraisal. So far, 389 SMI projects havebeen financed by DBP under the SMI component of Loan No. 1190-PH;/3 at thisrate, DBP will probably exceed the appraisal target number of subprojects (500)under this loan too. The average loan size for subloans under LoanNo. 1120-PH was P 369,000 or about 6% less than the average of P 393,000estimated at appraisal. Under Loan 1190-PH, the average loan size declinedslightly to P 363,000 resulting in a better distribution than expected atloan reallocation. Of the loans made under the two IBRD loans, 92% and 91%,respectively, went to small entrepreneurs whose assets at the time of loanapplication were under P 1.0 million. However, a slightly higher propor-tion of DBP financing (29%) has gone to borrowers with assets of overP 1.0 million under Loan No. 1190-PH than under Loan No. 1120-PH (25%).Under Loan No. 1120-PH DBP's SMI loans were fairly evenly distributed amongindustries: mechanical/electrical machinery and equipment industry (14%);ice plants and cold storage (12%); and extractive industries (10%). Projects

/1 Approximately P 292 million or 65% of the assistance provided came fromloans 1120-PH and 1190-PH.

/2 This is updated figure based on the finally disbursed amount. It isdifferent from the figure (336) reported in the President's Memorandum(R77-29) on the proposed Amendment to the Loan Agreement No 1190-PH,because of reallocation of some projects.

/3 Of the allocation of $25 million, $14.1 million was committed as ofAugust 31, 1977; the balance is expected to be committed by April 1978.

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so far financed under Loan No. 1190-PH have been more labor intensive thanin the past, but not to the extent hoped for at loan reallocation. Regardingregional distribution of investment, expectations have, to a large extent,been realized by project performance. Under Loan No. 1120-PH Metro-Manilaaccounted for about 42% of SMI investment and a similar proportion of DBPfinancing which was somewhat lower than the 51% share expected at appraisal.Under Loan No. 1190-PH, the comparable figures were 43% and 36%. The restof Luzon accounted for a smaller share of SMI investment under Loan No.1190-PH (28%) than under Loan No. 1120-PH (30%) and a larger share ofDBP financing. The share of the Visayas increased under Loan No. 1190-PHfor both investment (20% vs. 17%) and DBP financing (21% vs. 18%), most ofthe gain accruing to the less-developed region of Eastern Vrisayas. Theresources going to Mindanao have remained approximately the same under bothloans. However, within Mindanao the share of the Northern and Westernregions doubled while that of the Central and Southern regions declined by athird.

4.29 A study of the economic impact of a sample /1 of SMI projectsfinanced under the two IBRD loans was conducted by DBP's Business ResearchDepartment and showed that the projects' ERR ranged from 13.7%-116% with aweighted average ERR of 49.5%. These projects are estimated to have a valueadded component of P 175 million (over 20% of sales) comprising: wages(44%),/2 profit (37%); and financial expenses (19%). It is estimated that 15%of the sales, amounting to E 127 million, will be for export.

4.30 Employment Generation Impact of SMI Financing. The 799 SMI projectsfinanced under the Bank loans are expected to generate about 13,941 new jobs /3.The average cost per job is P 27,024 ($3,654) under Loan No. 1120-PH andP 48,600 ($6,920) under Loan No. 1190-PH. The higher average cost per jobunder Loan No. 1190-PH occurs because of a few large capital intensive projects(22 out of 389) approved in FY77. If these were excluded, the average cost perjob would fall to P 29,241 ($3,954)./4 About 31% of the loans made under

/1 This sample covered 49 SMI projects approved during April 1976 - June1977 for which economic rates of return were calculated and 445 projectsfor which partial economic indicators based on appraisal estimates wereaggregated.

/2 At appraisal ratio of wages to value added was estimated at 32%.

/3 7,536 jobs under Loan No. 1120-PH and 6,405 jobs under Loan No. 1190-PH.

/4 The average cost per job for an SMI project is approx:Lmately 25% of thatof larger projects.

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these two Bank loans would qualify as urban poverty lending. /1 In termsof size of the sub-borrowers, over 90% of the loan amount went to sub-borrowers with fixed assets below $250,000 /2 at the time of application toDBP. The average wage per worker ranges between P 5,400 and 6,700 which is

50% higher than the minimum wage rates.

4.31 Resource Mobilization. DBP has played an important role in mobil-izing long-term resources both internally and externally. Over the periodJuly 1975-September 1977, DBP raised P 847 million through the sale of itsCountryside bills. DBP has also on its own raised substantial long-termforeign exchange resources from the international commercial sources; sinceits first borrowing of $50 million in 1972, DBP has raised $315 million (6loans) from foreign commercial banks./3 DBP also operates as a tax receivingagency for the Government; taxes collected by DBP average E 40 billion perannum.

4.32 Other Activities. Besides its SMI financing programs, DBP hasestablished special programs to finance cottage industries and help lowerincome groups through participation in such programs as the Manila UrbanDevelopment Project which provides term credit for improving housing andestablishing small businesses in the region. Its real estate financingprogram also provides resources for construction and low cost housing improve-ment; in FY76 and FY77 alone DBP made 8,446 such loans amounting to P 94 mil-lion. DBP has also helped to establish and provide financial and technicalassistance to 34 PDBs. In their turn these institutions mobilize localsavings and utilize them to meet medium-term credit needs of the economy.

C. Operations

Overall Financing Operations

4.33 Overall Operations. DBP's operations include loans, guarantees andequity investments. A summary of its operations is shown in Annex 4, T-7. Since1947 until June 30, 1977 DBP's cumulative approvals amounted to P 27.6 billion,of which 51% occured in the 27-year period, FY47-73 and 49% over the four years,FY74-77. Since FY75 loans have replaced guarantees as the most important type

/1 The urban poverty threshold figure for 1977 being US$3,600.

/2 This is the ceiling suggested in the recent Bank report, "EmploymentCreation and Small-Scale Enterprise Development" (No. 1543 datedMarch 22, 1977).

/3 This excludes DBP's borrowings from international lending institutionsand under bilateral agreements.

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of operation owing to the increased availability of resources for onlending/L;equity investments have not been particularly significant. Over the period

1972-76 DBP's total approvals rose from P 1.8 billion to P 3.9 billion.This secular increase came to a halt in FY77 when approvals dropped toP 3.1 billion as a consequence of decreased agricultural lending, a fall inguarantees, and a reduction in hotel financing.

4.34 In terms of sectoral allocation, as of June 30, 1977, industry,agriculture and real estate had received 66%, 20% and 12% respectively oftotal approvals /2 (Annex 4, T-8). The balance comprises credit extendedto local governments (1.3%) and the banking industry (0.7%) principally

to PDBs.

4.35 The size of DBP's investments vary from small loans (minimumP 5,000) for handicrafts, tricycles /3 and water pumps to large investments inmanufacturing, mining and infrastructure. The number of small loans inDBP's portfolio fell in FY77 owing to the phasing out of small "socialloans" (para. 4.36) and the decrease in agricultural lending (para. 4.45)In general, DBP's guarantees pertain to large projects since only these haveaccess to suppliers' credits.

Industrial Lending Operations

4.36 Over the period FY47-77 DBP's cumulative industrial lending amountedto P 5.61 billion for 30,780 accounts (Annex 4, T-9). Over the period FY73-76the volume of industrial lending rose from P 55 million to P 1,080 millionand stood at P 1,079 million for FY77. The slight reduction in the volume oflending reflected the slowdown in the growth of some Philippine industriesand the consequent fall in loan applications. Over the period FY76-77 thenumber of loans dropped from 5,895 to 3,791 because of the sharp fall insmall loan applications for tricycle financing./4

/1 In the three-year period FY75-77 the proportion of loans in DBP's totalassistance approved was 66% as compared to an average of 10% for the

preceding three years.

/2 The financing of several large hotels in Manila in 1975 and 1976 had raisedthe proportion of DBP resources going into real estate financing.

/3 Tricycles are a popular form of low cost transportation in the Philippines.

14 In FY76, 3,950 loans for P 181 million were made for tricycle financing.The comparable figures for FY77 were 1,762 loans for P 52 million.

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Features of Industrial Loans

4.37 Size of Loans. Twenty-five projects,/L each over P 5 millionaccounted for P 873 million or 75% of the value of loans approved in FY77.DBP's position as virtually the largest source of long-term capital explainsthe number of large-scale projects in its portfolio. The smallest loan sizecategory (below P 50,000) accounted for 87% of the number of loans approved inFY77 (81% on a cumulative basis) but only 3.6% of the value of approvals./2 Astructural change has occured in the size distribution of loans. Loans belowP 50,000, after increasing more than twofold between FY75 and FY76, fell by 40%in number and 20% in value as a consequence of a fall in the tricycle financingprogram. Simultaneously, there was a shift away from the P 2.0-5.0 millionloan category to the P 1.0-2.0 million category. The overall average size ofindustrial loans, however, increased from P 183,000 in FY76 to P 285,000in FY77.

4.38 Industry Distribution. During the recent past, DBP's industriallending has covered a wide range of industries: mining (27% of lending inFY75-77); transport (23%); and textiles (12%). The mining figure reflectsDBP's significant exposure in Marinduque Mining. DBP's operations in medium-sized, labor-intensive industries /3 declined from 22.9% in FY75 to 11.0%in FY76, but rose again to 25.7% in FY77. Of the manufacturing projectsapproved during FY75-77, 61% were for the manufacture of consumer goods, 29%for intermediate goods and 10% for capital goods. DBP's industrial lendingis influenced to a large extent by the BOI. While DBP can accept a projectnot registered with the BOI, in practice projects would often not be commer-cially viable without Board registration. Hence BOI decisions on incentives,location, export targets and industry type are prime factors in determiningDBP's industrial loans.

4.39 Geographical Distribution. Attempts to move industry out ofMetro-Manila are reflected in DBP's lending operations in FY77; the share ofDBP's industrial lending in Metro-Manila fell from 37% in FY75 to 31% in FY76and 23% in FY77 (Annex 4, T-9). However, the amount of lending going toareas near Manila such as Central and Southern Luzon, varied from year toyear. The most encouraging trend, however, is the increasing amount of

/1 This includes an exceptionally large loan of P 355 million to the MarinduqueMining and Industrial Corporation, to finance the copper mining andrefining project.

/2 The average small loan size was P 12,000.

/3 Includes industries such as food processing, wood, leather, rubber andnonmetallic products, cottage industries, extractive industries (excludinglarge mining projects) and garments.

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resources going to Mindanao, a relatively underdeveloped region, whose shareincreased from 14% in FY75 to 41% in FY76 and 48% in FY77. While much ofthis lending was for mining projects, other industries are also being developed.DBP's industrial investment in the undeveloped regions of the Bicol, theCagayan Valley and Ilocos is still small.

4.40 Utilization of Industrial Loans. The utilization of industrialloans for the past five years is shown in Annex 4, T-10. The most strikingaspect of loan utilization is the volume of resources being used for refinanc-ing of existing debts; P 324 million in FY76 and P 417 million in FY77. Mostof this refinancing affects two large accounts: Marinduque Mining, P 300 mil-lion and P 299 million in FY76 and FY77 respectively; and Manila Brickworks,P 118 million in FY77. The large increase in loans for working capitalreflects both the more liberal attitude of DBP's management towards workingcapital funding and the concurrent need of many businesses for more workingcapital owing to a slackening of demand. Loans for the purchase of machineryand equipment fell considerably in FY76 but increased again in FY77.

SMI Lending Operations

4.41 Overall SMI Operations. The Bank became involved with DBP's SMIlending program in FY75. Over the two-year period, DBP's, SMI lending recordeda twofold increase raising DBP's SMI portfolio from P 132 million (776accounts) as of June 30, 1975 to P 384 million (1,588 accounts) as of June 30,1977 (Annex 4, T-11). The rapid growth can be explained both in terms of theincreased availability of resources for SMI financing and the organizationaland policy changes put into effect. The table below shows the trend of DBP'sSMI operations:

DBP: TREND OF SMI LOAN APPROVALS(P million)

FY74 FY75 FY76 FY77No. Amount No. Amount No. Amount No. Amount

Small industry loans(P 50,000-800,000) 98 27.2 212 44.9 235 58.9 331 55.5

Medium industry loans(over P 800,000) 12 15.2 42 57.9 54 85.6 48 86.7

Total SMI loans 110 42.4 254 102.8 289 144.5 379 142.2

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4.42 Despite a marginal reduction in the value of loans approved in FY77there was a sharp increase in the number indicating a smaller average loansize. When compared to previous years, a significantly higher proportion ofthe loans approved in FY77 were from the Branches since Head Office staffwere more invol.ed in loan collection and establishing a supervision systemthan in project evaluation.

4.43 Features of SMI Loans. The majority of SMI loans fall withinP 100,000 - 500,000 range (Annex 4, T-12). While the average size of the smallindustry loans fell from P 251,000 in FY76 to P 168,000 in FY77 the averagesize of the medium industry loan continued its rising trend and stood atP 1,807,000 for FY77. Few loans are approved in the F 500,000 - P 1.5 millionrange. The SMI loans are fairly evenly distributed among industries (Annex 4,T-13). The growth industries in FY77 were food manufacturing (14.2% in FY77v 7.2% in FY76) metal work (12.6% in FY77 v 4.6% in FY76) and nonmetallicindustries (7.0% in FY77 v 3.3% in FY76). The trend towards the financingof capital intensive industries discernible in FY76 was reversed in FY77when DBP reduced its financing of ice plants, cold storage and extractiveindustries. While the share of Metro-Manila in the total number of loansapproved dropped from 41.9% in FY76 to 29.5% in FY77, it increased from35.5% to 49.2% in value terms reflecting the larger average size loansapproved by Head Office (Annex 4, T-12). This increase in the share ofMetro-Manila was at the expense of the Visayas which experienced a declinefrom 23.6% in FY76 to 13.3% in FY77. The underdeveloped regions of NorthernLuzon and Mindanao gained marginally. The proportion of DBP's SMI loans forworking capital increased from 9.6% in FY76 to 18.1% in FY77 while fixedasset loans declined from 90% to 81.8%, reflecting DBP's increased awarenessof clients' needs for working capital finance (Annex 4, T-12). DBP permitsa maximum term of five years for its working capital loans and ten years forfixed assets loans. The average maturity of loans both in FY76 and FY77 was7.7 years (Annex 4, T-14). The majority of DBP's SMI borrowers continued tobe small entrepreneurs; in FY77, 82.6% of the recipients of SMI loans hadassets, at the time of application, of less than P 500,000; however,because of their low average size such loans accounted for only 41.4% ofapprovals. In contrast to FY76 most of the SMI loans approved in FY77 werefor expansion projects (72% of the number of projects), mainly due to growingopportunities for small and medium indutries to expand.

4.44 In FY77 when considering loan applications, DBP changed its approachfrom a "first-come, first served" to a more selective one based on a study ofthe economic conditions prevailing within different industries. This wassupplemented by adopting in early 1978 of an SMI investment priorities planaiming at SMI promotion in less developed regions and subsectors. DBP'sshort-term SMI development strategy also calls for selection of projectsbased on projects economic contribution (para. 4.14). These efforts shouldlead to a much deeper economic impact of DBP's SMI operations.

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Agricultural Lending Operations

4.45 DBP is the main source of medium- and long-term institutional creditfor agriculture. DBP's agriculture portfolio, with over 21,700 accounts, stoodat P 2.1 billion which represents 80% of DBP's portfolio by number and 26% byamount. DBP finances almost all sub-sectors of agriculture including foodand commercial crops, grain storage and processing, fisheries, livestock andpoultry. In FY77 DBP approved about 2,400 agricultural loans for P 510 mil-lion, a decline of 63% by number and 39% by amount over approvals in FY76owing to slowing down of DBP's "social loan"/1 programs which were facingmounting arrears. The size of the average agricultural loan has increasedand was P 21,000 in FY77.

Real Estate and Community Development Lending

4.46 DBP's real estate lending, covering low-cost housing, hotels/motels, resorts, and private hospitals amounted to P 295 million in FY77,P 448 million in FY76 and P 1,057 million in FY75. The drop in realestate financing occured as a result of a decline in hotel financing whichhad been undertaken by DBP in FY75 and FY76 at the request of the Government.In FY77, no financing was provided for new hotels in Manila as there is aglut of luxury hotel rooms and most of the new DBP-financed hotels arefacing low occupancy rates and are consequently unable to service theirdebts. DBP is permitting debt restructuring on a case-by-case basis. Underthe Agreement for Loan No. 1190-PH the Government undertook to make goodthese arrears and cover any losses resulting from foreclosure. DBP hasfinanced resorts outside Manila to the extent of P 262 million in FY75 andFY77.

4.47 With the emergence of the SSS, GSIS and NHC to provide financefor residential construction, DBP's exposure in this activity has declinedand is now concentrated on the provision of low-cost housing. In FY75-77,DBP made 13,600 loans averaging P 11,000 for cheap housing, and financeda low-cost cooperative housing project of 250 units for P 2.5 million.

Private Development Banks Financing Program

4.48 DBP is actively involved in the establishmen,t and promotion ofPDBs. These banks, located in the provinces, have been established toprovide finance to small scale entrepreneurs and farmers. To date, DBP hasassisted in the establishment of 36 PDBs whose total resources at the end of1976 amounted to P 476 million with loans outstanding of P 361 million.

/1 Social loan programs are implemented by DBP at the Government's request.While these programs are deemed to be socially and economically desirablethey are invariably not financially viable. As there are few otherinstitutions capable of handling these programs, the Government has beenusing DBP as a conduit.

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Their portfolio comprised agricultural (46.9%), industrial (35.2%) andmiscellaneous (17.9%) loans. DBP's financial involvement in these banksconsists of equity investments in preferred shares; rediscounting facilities,and savings and time deposits resulting from the sale of DBP CountrysideBonds. At the end of 1977, DBP's total outstanding financial as.-.stance tothe PDBs was P 94.1 million, comprising P 88.3 million in rediscounted loans,P 2.7 million savings and time deposits; and P 3.1 million in equity participa-tion. Owing to its substantial shareholding, DBP is represented on the boardsof the PDBs; DBP provides some technical assistance but is not otherwiseengaged in their management.

4.49 The major problems faced by PDB are lack of professional management,inadequate appraisal and supervision techniques, poor portfolio performance,and a weak financial position. In addition, DBP's own Department of Develop-ment and Rural Banks (DDRB) dealing with PDBs needs to formulate its strategyvis-a-vis PDBs, increase and upgrade the quality of its staff, and rationalizeits procedures. Despite the problems, PDBs could be an effective way ofchanneling development funds to the rural areas and complementing DBP'sown lending to SSEs. Considering this potential and to increase significantlyits assistance to SSEs, DBP has contemplated a significant increase in itsfinancial and technical assistance to PDB in the next 2-3 years. An importantcomponent of DBP's technical assistance would be the setting up in DBP of aDevelopment Banking Institute (DBI) (para. 5.04) to upgrade the expertise ofPDB management and staff. Morever, DBP is also currently reviewing thepresent organization structure, policies and procedures pertaining to its PDBoperations handled by DDRB.

Equity and Securities Investments

4.50 DBP's equity investments comprise holdings acquired throughexercise of conversion options; investments in public enterprises under theGovernment's equity financing programs; and equity investments in PDBs.During FY77, DBP approved six equity investments totaling P 75.4 million.As of June 30, 1977, its equity investment portfolio stood at p 798.2 millionof which 56% was in 8 Government-controlled companies and 44% in privatelyowned companies. DBP and the Goverment are currently considering the possibi-lity of DBP's divesting itself of three of these investments, totalingP 397.6 million./l DBP has also an active securities portfolio which stoodat P 1,614 million as of June 30, 1977; most of the investments are inGovernment-owned institutions.

/1 The three investments are Food Terminal Inc., National Steel Corporation (NSC)and National Housing Corporation. DBP has provided 100% of the paid incapital for the first two institutions and 25% for the third. In March1978 DBP entered into a lease/sale agreement with Philippine Export andForeign Loan Guarantee Corporation for sale of its total equity investments(P 183 million) in NSC for P 222 million.

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Guarantee Operations

4.51 DBP provides guarantees to cover: (a) foreign suppliers' credits

for the import of capital goods; (b) commodity credit financing;/l and

(c) peso credits extended by local commercial banks to DBP clients, especially

for short-term working capital. While guarantees still account for the

largest share of DBP's cumulative financing operations, guarantee approvals

have declined since 1974. A significant proportion of the value of the

foreign currency guarantees is concentrated in a few large accounts: in

FY76, 5 accounts were responsible for 80% of guarantees; in FY77, 4 accounts

accounted for 70%. If the large guarantees are excluded, the average guarantee

size for FY76 and FY77 would be $1.6 million. As of June 30, 1977 DBP's

outstanding contingent liabilities for guarantees amounted to the equivalent

of P 4.4 billion. Previously DBP provided guarantees for projects even if

they could borrow directly from DBP on the grounds that supplier credit terms

were more favorable than those offered by DBP. In addition, the size of the

suppliers' credit was often larger than DBP could have offered. DBP's

management has recently decided to offer a loan/guarantee package rather than

guarantees only.

Other Operations

4.52 To provide capital assistance for the establishment and development

of rural banks, the Central Bank established a trust fund administered by

DBP. Capital assistance is extended to rural banks in the form of subscrip-

tions to their preferred shares. For FY77, DBP invested a total of P 6.5 mil-

lion in 38 rural banks. As of June 30, 1977, total equity investments of DBP

in rural banks amounted to P 45.2 million. DBP loans to local governments

increased from P 57.9 million in FY76 to P 73.1 million in FY77.

D. Financial Condition, Financial Performance

and Quality of Portfolio

Financial Condition

4.53 DBP's balance sheets are summarized in Annex 4, T-15. During the past

two years (FY76 and 77), DBP's total assets grew at an average rate of 35%

and reached P 14.3 billion as of June 30, 1977. During the same period DBP's

long term portfolio grew at the faster rate of 46%. The structure of assets

and liabilities has remained stable over the past two years. Long-term

portfolo accounted for the largest share (63%) of total assets as of June 30,

1977, followed by current assets (21%) and other assets, (16%). As of the

same date about 62% of total assets were financed through long term debts, 20%

through equity funds, and 18% through current and other liabilities.

/1 From the US Commodity Credit Corporation (CCC) and the Canadian Wheat

Board (CWB) for the import of new cotton, tobacco, and flour.

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4.54 In the past two years (FY76-77) a number of measures were taken tobolster DBP's long term resource position. As agreed under conditions forLoan No. 1190-PH the Government: (a) made an additional contribution ofP 883 million /1 to DBP's share capital;(b) converted P 940 million /2 of itsdeposits from -hort-term into medium- and long-term. DBP, on its own, raisedadditional long-term resources of P 1,916 million by issuing its CountrysideBills amounting to P 728 million and raising P 1,188 million in foreign exchangefrom international commercial sources. The net impact of these measures wasthat DBP's total debt (including guarantees) to equity ratio which had beenshowing a rising trend up to FY76 actually declined, albeit marginally, to5.5:1,/3 while current ratio, a measure of liquidity, after deteriorating inFY76 to 1:1 improved marginally to 1.2:1. Despite these favorable developmentsDBP's liquidity is still dependent on the roll-over of short-term Governmentdeposits, a consequence of the persistent imbalance between maturity structureof DBP's assets and liabilities. This makes DBP's liquidity position vulnerableto any heavy withdrawals by the Government of its deposits, even though suchwithdrawals are highly unlikely.

4.55 DBP's management recognizes this problem and is committed tobolstering DBP's cash position through: (a) seeking a further increase in itsshare capital by P 1.5 billion to P 4.0 billion by 1981; (b) selling DBP'sinvestments amounting to P 693.4 million /4 in its two subsidiaries and oneaffiliate company; (c) improving loan collections; (d) obtaining compensationfrom the Government for arrears on "social loans" made at the Government'abehest; (e) accelerated sale of acquired assets; and (f) raising additionallong-term resources from the domestic as well as international markets. Theseplans were discussed during negotiations when the Government agreed inrespect of (a) and (d) above, and also assured the Bank that with any with-drawal of its deposits maintained with DBP, due consideration would be givento DBP's liquidity position vis-a-vis its resource requirement and that theGovernment would continue to assist DBP in arranging adequate long-termresources.

4.56 Based on its present reasonably sound capital structure, its plansfor raising additional long-term resources, and its projected financialposition, DBP does not need any relaxation in its present debt to equityratio limitation of 10:1.

/1 This includes P 200 million contributed in September 1977 and P 28 millioncapitalized profits.

/2 This compares with P 400 million which the Government had agreed to convertNo. 1190-PH.

/3 This is well within the limit of 10:1 specified in the Loan AgreementNo. 1190-PH.

/4 This consists of equity investment, P 397.6 million, and advancesagainst guarantees, P 295.8 million.

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4.57 Foreign Exchange Risk. During negotiations for Loan No. 1190-PH,the Government and DBP undertook to reduce DBP's foreign excchange riskexposure on its commercial borrowings. Consequently, DBP set up for thefirst time in FY76 a "Reserve for Foreign Exchange Risk" and passed on foreignexchange risk to all borrowers under its new foreign exchange borrowings.However, contrary to expectations, the level of DBP's foreiLgn exchange riskexposure rose from US$107 million in 1975 to US$267 million as of December 31,1977, principally because of the use of the proceeds of its commercial foreignexchange borrowings for repayments of maturing other obligations. This wasinevitable due to DBP's liquidity problems particularly in 1976. DBP'smanagement is endeavoring to reduce DBP's foreign exchange risk exposure.Negotiations are under way with the CB to obtain year-to-year cover againstDBP's debt repayments. Currently DBP is in the process of identifying borro-wers, particularly Government projects, that had in earlier years receivedforeign exchange funds from DBP, with a view to persuading them to assume theexchange risk on these funds. Moreover, DBP has decided to use its foreignexchange borrowings in future only for lending in foreign exchange and formeeting foreign exchange debt maturities. The progress made on these matterswere reviewed at negotiations when it was ascertained that the measurescurrently being taken by DBP would not only arrest any further increase inDBP's exposure in foreign exchange risk, but would also considerably reduceit in the near future./l

Financial Performance

4.58 DBP's summarized income statements are shown in Annex 4, T-16. DBP'snet income rose from P 71.4 million in FY75 to P 84.7 million (3.9% return onequity) in FY76, but declined to P 82.3 million (3.2% return on equity) inFY77. DBP's profitability remains low, mainly because of its low lendingrates in the past and its inadequate collection performance. Measuresfor enhancing DBP's income earning capability, discussed and agreed atnegotiations for Loan No. 1190-PH, are now being implemented with varyingdegrees of effect on its financial performance. First the upward revision ofinterest rates, which became effective in January 1976 resulted in theincrease of DBP's interest spread (on accrual basis) from 2.5% in FY75 to3.3% in FY76 and 3.7% in FY77. The interest spread on an accrual basis willfurther increase as high interest yielding loans assume a larger share ofDBP's portfolio. Second, along with changes in interest rates, DBP revisedupward its penalty charges. Third, since September 1976, DBP has beguncharging an annual service fee of 2% on new loan approvals exceeding P 150,000.However, these measures have not yet been reflected in the financial statements,since DBP reports income on a cash basis and financial expenses on an accrualbasis.

4.59 Being a Government-owned development oriented institution, thecharacter of which is manifested in a number of low income yielding sociallending programs undertaken at the behest of the Government, DBP's financialperformance should not be compared with the private, profit-oriented developmentbanks. Nontheless, DBP's management recognizes that its low profitabilityincreases its dependence on Government funds which are becoming increasingly

/1 DBP estimates foreign exchange exposure to reduce- to $124 million beforethe end of 1978.

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difficult to obtain due to budgetary constraints. Massive efforts aretherefore being undertaken to increase DBP's profitability by improving DBP'scollection performance (para. 4.65). Profitability targets on a departmentalbasis have been set up and are being vigorously pursued. The proposed liqui-dation of DBP's low income yielding investments (para. 4.55) and accelerationof efforts to dispose of acquired assets would also improve DBP's return ontotal investment. In addition, DBP's profitability needs to be insulatedagainst any losses it may suffer on the social lending programs. This can beachieved if DBP has the freedom to finance only those programs which it finds,based on its evaluation, financially viable; if on social considerations theGovernment requires DBP to undertake programs not financially viable, DBPshould undertake them on an agency basis against back-to-back Governmentfunding. During negotiations, the Government agreed to this arrangement.

Audit

4.60 DBP's accounts are audited by the Commission on Audit (COA), aGovernment body. The progress made by COA auditors since 1975, has beenmixed. COA auditors have prepared long form reports on FY75 and FY76 in linewith the Bank's "Illustrative Form of Audit for DFCs". These reports for thefirst time contained some analysis of DBP's portfolio. Satisfactory progresshas been made in expanding the coverage of audit reports and streamlining theaudit procedures. However, there are still some shortcomings in reportingstandards and auditing procedures especially in the portfolio analysis.Following its further discussions with the Bank, COA established in November1976 a " Special Audit Study Team for DBP". In order to implement therecommendations of this Team, DBP's COA auditors have formulated a "Programof Action" and reached an agreement with DBP's management on the "Scope of1977 Audit." These plans are somewhat ambitious but represent a genuinecomprehensive effort aimed at upgrading COA's audit coverage and practices.During negotiations progress in implementing the "Program of Action" and"Scope of 1977 Audit" was reviewed was found generally satisfactory. Anunderstanding was also reached with DBP and the Government with regard to thesubmission of audit reports within the time limit of four months after theclose of the accounting year.

Reserves Policy and Position

4.61 As agreed during negotiations for Loan No. 1190-PH, DBP adopteda Statement of Reserves Policy on January 21, 1976 and started makingprovisions for doubtful accounts which as of December 31, 1976 stood atP 66.1 million. These provisions were made on the basis of only a partialreview of DBP's portfolio and therefore are not adequate. The agreed "Scopeof 1977 Audit" (para. 4.60), calls for a comprehensive review of DBP's port-folio. Progress on the proposed portfolio review and the provisions fordoubtful accounts will be discussed at negotiations. In accordance with

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DBP's reserves policy, /1 20% of the profits for FY76 and July-December 1976were appropriated to a foreign exchange risk reserve amounting to P 29.2 mil-lion (about 2% of actual foreign exchange risk exposure) as of December 31,1976 as of the same date the accumulated appropriations for contingenciesstood at P 129.8 million.

Portfolio Quality

4.62 Loan Portfolio. Arrearages on DBP's loan portfolio, while havingbeen reduced over the past four years, continue to remain unsatisfactorilyhigh and constitute one major cause of DBP's tight liquidity situation. Ananalysis of DBP's loan portfolio is given in Annex 4, T-17, while the follow-ing summary shows the trend of arrears over the past three years:

DBP: ARREARAGES ON TOTAL LOAN PORTFOLIO(As Percent of Total Outstanding)

No. of Accounts Principal(As % of Total) Actual Arrears Affected

June 30, 1974 56.6% 23.5% 58.7%(of which industrial loans) (82.2%) (21.6%) (59.9%)June 30, 1975 60.0% 15.5% 46.8%(of which industrial loans) (72.5%) (12.7%) (44.1%)June 30, 1976 71.6% 10.2% 40.7%(of which industrial loans) (71.1%) (7.5%) (41.4%)June 30, 1977 77.7% 10. 5% 44.3%(of which industrial loans) (77.3%) (6.5%) (34.9%)

4.63 The improvement (in relative terms) in the overall arrears positionreflects the immediate impact of a major rescheduling effort coupled with arapid increase in the outstanding portfolio base. However, in the past two

/1 DBP's Reserves Policy requires it to appropriate its annual net incomeafter provisions for doubtful accounts as under:

(a) 20% to a reserve for foreign exchange risk up to a minimum of atleast 15% of DBP foreign exchange liabilities on which itcarries foreign exchange risk;

(b) 20% to share capital; and

(c) the remaining balance to a reserve for contingencies untilsuch time as this reserve is built up to at least 15% ofDBP's outstanding contingent liabilities.

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years the number of accounts (especially small loans) in arrears has actuallybeen rising, shifting the structure of DBP's arrearages. Formerly, a largeshare of arrearages was accounted for by a small number of very large accounts.Now, an increasing share of arrearages is attributable to a very large numberof small accounts mostly relating to small industry, agriculture and "social"'loans. To some extent the arrears position is exaggerated by inclusion of"technical" arrears arising from remittance delays and delayed commencementof initial repayments due to either project completion delays or insufficientgrace period allowed./l On a sectoral basis, agricultural loans continue toexperience the highest default rate with arrears amounting to 1 527 millionor 24.8% of total agricultural loan portfolio. Industrial loan portfolio hasthe lowest arrears ratio of 6.5% having declined from 12.7% in the past twoyears. The delinquency rate on cottage industry and SMI loans is much higherthan on the large industry loans. Arrears on large industry portfoliocarried by IPD I amounted to only 4% with only 29.4% of this portfolio"infected" by defaults. SMI loan arrearages declined from 27.2% in FY75 to24.0% in FY77, but the ratio of portfolio in default slightly increased(Annex 4, T-18)./2

4.64 Various diverse factors are responsible for the continued highdelinquency rate on DBP's loan portfolio. Because DBP is the most importantsource of term credit for almost all sectors, its portfolio is naturallysusceptible to any adverse downturn in business and economic conditions.DBP's portfolio was severely hit first by the massive devaluation of 1972and then by slack business conditions in recent years. Agricultural loanswere additionally hit in some areas, by natural calamities, floods, earth-quakes and drought. In fact, in the past couple of years most of thefinancial institutions in the Philippines, particularly those Government-owned, experienced a deterioration of their loan portfolios (para. 3.25).DBP's weak appraisals in the past and inadequate supervision efforts coupledwith DBP's stringent loan conditions especially for small loans /3 have alsocontributed towards low loan recoveries.

4.65 DBP's management is committed to improving DBP's arrears situation.As agreed during negotiations for Loan No. 1190-PH, DBP radically raised itspenalty charges and the reporting of arrears and billing of accounts weregreatly improved. Stringent conditions for small loans were relaxed (para. 4.13)and some major steps are being taken to upgrade standards of appraisal and toset up an effective supervision system. Furthermore, in mid-1977 DBP launcheda massive and generally well organized collection drive. Although it is tooearly to expect the recent collection drive effort to radically transform

/1 About 12% of arrears (47% of delinquent portfolio) were overdue for 6 monthsas of June 30, 1977.

/2 During negotiations for the first SMI loan to the Philippines (Loan No.1120-PH) DBP had committed to reduce its ratio fo SMI arrears to 25%of outstanding SMI portfolio by August 31, 1979. Thus, DBP achievedthis target two years in advance.

/3 Such as high loan collateral and debt equity ratio requirement, shorterloan maturities, too short grace periods and limited working capitalfinancing.

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the arrears picture, the collection data for the July-December 1977 periodindicated that the collection performance at least for industrial loans isimproving. DBP's collection drive is concentrated on loan collecting on anindividual account basis. Whereas this may be an effective approach forlarge accounts, for small accounts, which account for 98% by number ofaccounts in arrears and over 44% of actual total arrears, a sub-sectorapproach would be more appropriate and manageable. DBP has, agreed to adoptthis approach. DBP's management has also agreed to make its collection drivea permanent feature so as to achieve the following targets of reductions inarrears:

June 30, 1979SMI Portfolio Total Portfolio

Arrears Ratio 16% 7.5%Rate of PortfolioAffected 40% 35%

4.66 Given the magnitude of the arrears involved and ithe diversity ofproblems of the various sectors and subsectors served by DBP, an overnightchange in its arrears situation cannot be expected. The above targets aretherefore, considered realistic. During negotiations, the Government agreedto reimburse to DBP the amount of the arrears on loans made at its behest.

4.67 Other Portfolio. Arrears relating to DBP's guarantees have declinedquite substantially in the past two years; advances on guarantees as apercentage of total outstanding guarantees declined from 13.5% in FY75 to 8%in FY77. This reduction was mainly achieved through conversion of advancesinto loans or equity investments. DBP is upgrading the standard of itsappraisal of guarantee requests so as to ensure that only viable projects areentertained. About 56% of DBP's total equity investment as of June 30, 1977was in companies which were either operating at a profit or were still in theconstruction stage. Twelve companies in which DBP held investments ofP 345.4 million (43% of total) were operating at a loss, but DBP does notconsider its investments in jeopardy. Investments in companies in liquidationamounted to P 3.0 million, fully covered by provisions for possible losses.DBP's acquired assets portfolio has remained almost stagnant since June 30,1976. Two largest accounts (Iligan Steel and Bay View Hotel) account for 90%of the book value of total acquired assets. The appraisal value of acquiredassets as of June 30, 1977 exceeded their book value.

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E. Prospects

Business Prospects and Projected Operations

4.68 The uncertain business climate generated by the worldwide recessionof 1974-76 has resulted in a much lower volume of DBP's financing for newcapacity creation in the industrial sector. However, over the next year,the indications are that investment will pick up gradually. These expectationsare reflected in DBP's business forecasts which show that its overall levelof new loan approvals, after declining in aggregate terms in CY78, wouldmaintain a steady trend during CY79-82 /1 as detailed in Annex 4, T-19 andsummarized below:

DBP - PROJECTED NEW LOAN APPROVALS(P millions)

1977 1978 1979 1980 1981 1982

Industrial loans /a 1,670.3 1,402.4 1,488.6 1,611.2 1,785.0 1,980.7Foreign exchange loans (947.5) (706.9) (795.5) (849.6) (934.5) (1,028.0)Agricultural loans 608.6 711.3 752.1 885.8 1,043.0 1,230.2Real estate and Government

loans 457.3 257.2 254.0 255.1 274.3 298.0Private development banks 44.6 65.6 105.0 167.9 170.0 170.0

Total approvals 2,780.8 2,436.5 2,599.7 2,920.0 3,272.3 3,678.9

/a Inclusive of loans for transportation and public utilities.

4.69 Projections of approvals for CY77 are based on actual approvals inthe first half of the year and projects in the pipeline which are expected tomaterialize. Approvals for CY78-82 are based on the anticipated investmentclimate for each sector. Projected loan approvals assume that exceptionallylarge industrial loans which characterized DBP's 1977 approvals would not berepeated in future. This explains the 18% fall expected in approvals inCY78. A lower volume of approvals for transportation and public utilitiesprojects have also contributed to this reduction.

4.70 DBP's projected SMI loan approvals are shown in Annex 4, T-20. DBPexpects its SMI loan approvals to grow at 10% per annum except in CY79 when,due to backlog demand, a 15% growth is expected. DBP's branches will beplaying a greater role in the future than in the past in financing new

/1 Effective January 1, 1977, DBP shifted from fiscal year to calendar year.

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SMI loans; their share in new approvals is expected to be around 60% bynumber of approvals (vs. 50% in FY76/77) and 38% by amount. (vs. 30% inFY76/77). The bulk (86%) of the loans would be in the size range ofP 50,000-800,000 absorbing about 46% of the total amount of approvals, anincrease from 41% in FY77, with a corresponding fall in the share of mediumindustry loans.

Resource Requirements

4.71 As of June 30, 1977, DBP's net long-term resources stood atP 547.5 million as detailed in Annex 4, T-21. Between July 1977 and June 30,1980, a three-year period, DBP's total commitments for loans and investments areestimated at P 7,808 million, the financing of which is projected as follows:

P million

Net resources as of June 30, 1977 547Additional capital subscriptions 1,055Countryside Bills - (net of redemptions) 1,882Net recoveries and cash generations 569Divestment of investments in subsidiaries 693Borrowings from CB /a 407Borrowings from foreign commercial sources 1,650New borrowings from international institutions (IBRDand ADB) 1,005

Total 7,808

/a Drawdown on funds for specific types of projects (hotels, goldmining projects, high priority agriculture projects, and banks'capitalization.)

4.72 During negotiations, DBP's plans for raising the requisitecurrency resources were reviewed while the Government's agreement wasobtained in respect of (a) proposed additional contribution to DBP'sshare capital; and (b) help to DBP in raising the requisite resources.

4.73 The new borrowings from IBRD and ADB shown in the above table, interalia, include the proposed Bank loan of $80 million (P 592 million). Thisloan will have the following three components:

- 47 -

US$ million

(a) for large industrial projects - 50.0(b) for SMI projects - 29.7(c) for technical assistance to PDBs - 0.3

Total 80.0

4.74 The large industry loan component ($50 million) would finance about41% of total new foreign currency commitments of IPD I in the two-year periodafter June 30, 1978; DBP's existing foreign exchange lines of credit forindustrial loans are estimated to be fully exhausted in the third quarterof 1978. Loans from ADB and foreign commercial sources would meet theremaining 59% of the commitments. The SMI loan component ($29.7 million)would finance 75% of DBP's SMI loans to be approved from May 1978 to June1980./I DBP would finance the remaining 25% of SMI loans from its ownfunds.

Financial Projections

4.75 Projected Financial Performance. Based on its business forecast(para. 4.68) and the assumed availability of resources, DBP's net income isprojected to rise rapidly from P 118 million in CY77 to P 336 million inCY78, P 515 million in CY80, and P 979 million in CY82. This rather excep-tionally high growth is due to: (a) rising weighted lending rate of DBPas share of high interest yielding loans in total portfolio would increase;(b) assumption of constantly improving collection performance of DBP /2;(c) rapidly rising portfolio; and (d) conversion of accumulated interest onhotel loans /3 into preference shares shown as income in CY78-82. If thenon-cash income from the hotels is ignored, the net income projected forCY78-82 would decline by 35%. The projected level of net income would resultin increasing the gross return on average assets from 8.2% in CY76 to 9.7% inCY78, 10.1% in CY80 and 11.6% in CY82. Over the same period the ratio ofadministrative expenses to average assets is estimated to decline from 1.4%in CY76 to 1.0% in CY82. DBP's projected income statements are given inAnnex 4, T-22.

4.76 Projected Financial Position. DBP's projected balance sheets aregiven in Annex 4, T-23 Total assets which stood at P 14.3 billion as of June 30,1977 are estimated to increase to P 18.6 billion in CY78, P 23.6 billion inCY80 and P 29.2 billion in CY82 showing an average annual growth rate of 15%.This growth rate is slower than the 35% growth achieved in FY77 and the 22%

/1 The SMI component of the proposed loan is expected to finance about855 projects generating a total investment of P 405 million and about13,700 jobs at an average investment cost ot $4,000 per job.

/2 On an average a collection ratio of 60% is assumed. The actualcollection ratio in CY77 was 57%.

/3 It is a part of DBP's rescheduling package for new hotels in Manilafacing low occupancy rates.

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growth projected for DBP in the five year plan. The largest growth is shown

in the loan portfolio which over the same period shows a more than two-fold

increase. A large proportion of the additional investment is proposed to be

financed through borrowings, but the planned increase in paid-in capital,

coupled with a rapid increase in retained earnings, would enable DBP to

maintain a satisfactory long-term financial position; the ratio of total

debts (including guarantees) to equity is estimated to decline from 5.5:1 in

FY77 to 4.9:1 in CY78, 4.1:1 in CY80 and 3.3:1 in CY82. Similarly the

short-term financial position is strong with a constantly improving current

ratio of 1.2:1 in FY77, 2.1:1 in CY78, and 2.4:1 in CY80 and CY82. The

estimated debt service cover is less than unity in the second half of 1977

but improves gradually thereafter to a satisfactory level (Annex 4, T-24).

5. CONCLUSIONS AND RECOMMENDATIONS

Objectives of the Proposed Loan

5.01 The objectives of the proposed loan are: (a) resource transfer;

(b) a further contribution towards achievement of the Philippine Government's

objectives in SMI development; and (c) continuation of the Bank's institution

building effort with DBP. The proposed loan would continue the Bank's

efforts to effect resource transfers for Philippine industrialization.

Funds under the proposed loan would be used both for large-scale industries

and for modern SMI. Investment in the large industry projects would aim at

further diversification of the country's industrial base by promoting

investments in nontraditional export industries, downstream domestic proces-

sing of traditional exports and creation of basic capital goods industries.

A wider geographical spread of new industrial investment than has been usual

in the past is also expected, thus contributing to the Government's efforts

to alleviate income disparities in the country. The SMI loan component

would promote additional investment in this sector, help maintain the flow

of institutional credit availability to SMI, achieve further regional

dispersal of SMI investment, contribute to optimum utilization of existing

SMI capacity by increasing availability of funds for working capital finan-

cing and create additional job opportunities at a low cost. Through these

means, the SMI project will contribute towards easing the urban poverty

problem in the Philippines.

5.02 Since the Bank made its first DFC-type loan in 1974, DBP has made

satisfactory progress in strengthening its institutional set-up, capability,

and performance, especially in respect of organizational structure, manage-

ment, quality of staff, procedures, operational policies, quality of apprai-

sals, and capital structure. DBP's multi-sectoral involvement and the

magnitude of its operations, make its institution-building task long and

arduous. Against this background the progress DBP has made in the past

three years is commendable. The proposed loan would afford the Bank an

opportunity to continue its association with the institution building

process. The specific areas where further improvements are expected are:

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(a) quality of industrial and SMI appraisals and supervision; (b) areduction in loan arrears and improvement in loan portfolio; (c) strengthen-ing of DBP's long-term resource position; (d) upgrading the quality ofaudit; (e) more efficient resource allocation by setting investment priori-ties; and (f) significantly enhanced impact of DBP's developmental role byadopting a clearly defined development strategy. DBP's management is fullycognizant of the need and importance of introducing further institutionalimprovements and is making constant efforts to achieve them in close coopera-tion and consultation with the Bank.

Justification of the Loan

5.03 For implementation of its development program for the next fiveyears, the Philippines would depend on a large net inflow of resources /1.The proposed loan would result in a net resource transfer of $80 million,not counting the net beneficial impact that the subprojects financed underthe loan would have on the country's balance of payment position. Theloan would be used for economically viable and sound large industry andSMI projects thereby contributing to a balanced growth of the industrialsector. Since the individual projects to be financed under the proposedloan cannot be identified, at this stage, an ex-ante analysis of theeconomic impact is not possible. However, it is expected that the sub-projects financed will yield about the same level of economic and finan-cial returns as projects financed under the previous three loans.

Features of the Loan

5.04 Purpose. The large industry component of the loan would be usedto finance direct capital goods import requirement of eligible industrialenterprises and the direct and indirect foreign exchange component of domes-tically manufactured capital goods estimated at 50% and that of civil worksestimated at 45%. The SMI loan component would be used to finance fixedassets and permanent working capital requirements of SMI subprojects. Theproceeds of the proposed loan would finance 75% of each SMI loan represen-ting the direct and indirect foreign exchange component of these projects /2.As in the previous industrial loan, the proposed loan would not be used forfinancing of subsectors already covered by other IBRD loans through DBP andthe rural credit loans through CB. In order to ensure an even geographicaldispersion of SMI subprojects and financing of a larger number of small industrysubprojects a limit of 10% of the SMI comDonent of the loan is proposed for

/1 According to the Five-Year Philippine Development Plan the totalforeign exchange requirement in 1978-82 period would be $43.4 billion.

/2 Based on a study of a sample of SMI projects, DBP has estimated thaton an average the direct and indirect foreign exchange component of SMIprojects, financed under Loan No. 1120-PH, was 58% and that DBP financed75% of the project cost. Thus, about 75% of DBP's financing representedforeign exchange component, the same as was estimated for SMI projects atappraisal.

- 50 -

loans over P 1.5 million in Metro-Manila area. The PDB conmponent of the loan($300,000) would help finance the establishing of the proposed DevelopmentBanking Institute (DBI). To assist PDBs in overcoming their structural weak-nesses and achieve their potential as retail development institutions, DBP hasproposed to establish DBI to be the focus of training programs to motivate,transform, and develop PDB management as well as to upgrade staff capabilitiesin project appraisal and supervision and in bank management: and systems. Theproposed establishment of DBI coupled with the anticipated improvements inDDRB (para. 4.49) would hopefully justify in the future the Bank's participa-tion in PDB financing, at least on a selective basis.

5.05 In the long run, the proposed DBI would also be able to offer itstraining assistance to other smaller institutions such as rural banks. Theadministration of DBI will be the responsibility of DBP's ]DDRB. DBI willeventually be provided with complete facilities, vehicles, equipment, andsupplies to facilitate the discharge of its training functions. DBP, inaddition to a core group of 12 DDRB staff assigned to DBI, plans to engagean experienced consultant to help it plan and implement DBI. The proposedBank loan component would finance 100% of the consultant's cost and directand indirect foreign exchange component in capital costs and operating costsof DBI in its initial two years of operation.

5.06 Component for Financing Projects Conforming with the Bank's UrbanPoverty Program. As noted in para. 4.30, DBP has achieved satisfactoryresults in terms of allocating the proceeds of the two SMI Bank loans tosmall entrepreneurs and labor-intensive projects. It is important under theproposed loan that DBP should continue to endeavor to reach smaller enterprisesand finance labor-intensive projects. Toward this objective, it is expectedthat about 90% of the SMI loan component would be used for financing:(a) projects which create employment at a gross capital cost per job of nothigher than $3,600 /1 the threshold figure for the Philippines as determinedby the Bank; or (b) enterprises with fixed assets not exceeding $250,000.

5.07 Form of Lending. As for all earlier Bank loans to DBP and inaccordance with the Philippine Government's wishes the prcoposed loan would bemade to the Government and re-lent to DBP.

5.08 Currencies and Foreign Exchange Risk. The Government would bearthe entire exchange risk on the loan component utilized for SMI financing andthe proposed DBI. The exchange risk on the loan component used for largeindustry would be borne by the subborrowers.

5.09 Amortization Schedule. As is normal for the Bank's DFC projectsthe large industry component of the proposed loan would have a flexible

/1 This refers to 1977 prices. An allowance for inflatiLon factor would bemade while reviewing the actual performance under the loan.

- 51 -

amortization schedule which would correspond roughly with the expected aggre-gate amortization schedules of subloans financed. The maximum terms of suchsubloans would be 15 years including a grace period. Since the number ofsubloans under the SMI loan component would be much larger (over 850), forthe sake of administrative convenience a fixed amortization schedule stretchingover 20 years including a 5-year period of grace is recommended for the SMIloan component as also for the PDB component. The maximum maturity of SMIloans would be 12 years including the grace period. It is expected that theproceeds of the entire proposed loan would be committed in two years anddisbursed within four years of the signing of the loan (Annex 4, T-25).

5.10 Free Limits. For large industry subloans, a free limit of $1.5 mil-lion is recommended; no aggregate free limit is proposed as free limitprojects accounted for less than 10% of commitments so far under Loan Nos.998-PH and 1190-PH. It is expected that under the proposed free limit the Bankwould get an opportunity to review about 40% of subloans representing about75% of the loan component. For the two SMI loans made by the Bank to DBPno free limit mechanism was used as this was considered an inappropriatemechanism for influencing the quality of appraisals. Instead DBP was requiredto submit to the Bank monthly summary statements of SMI loans approved,together with appraisal reports on all loans above P 500,000. Reviews ofthese reports and regular supervision missions were considered sufficient toensure adequate supervision of the quality of appraisals. The experienceover the last three years has proved that the approach taken was a sound one.The improvements made by DBP in its SMI loan appraisals could not have beenbetter or faster if subprojects had been subject to a prior review by theBank. No change in this approach is recommended for the SMI component of theproposed loan.

5.11 Subloan Sizes. DBP has assured the Bank that it would finance areasonably large number of projects under the proposed loan. It is recommended,therefore, that the maximum size of the large industrial subloan be fixed at$6.0 million. The average size of subloans under this component is, however,expected to be about $1.8 million. The maximum size of SMI loans would beP 2.5 million and minimum size P 50,000, which size range falls within thedefinition of SMI.

5.12 Debt/Equity. As noted in para. 4.56, DBP is not expected to need,in the near future, any increase in its present borrowing capability which isten times its equity.

5.13 Relending and On-Lending Rates. As for all previous Bank loans toDBP, the Government would re-lend the loan to DBP at the prevailing Bankrate, currently 7.5%. DBP would on-lend the loan at 12% p.a. to subloanssecured by land mortgage and at 14% p.a. secured otherwise. In addition, aservice fee of 2% would be charged on subloans over P 150,000 ($20,300).However, considering the foreign exchange risk, the effective interest rateon the foreign currency subloans, as past experience shows, would be in therange of 20-22% which would mean a real interest rate of 12-14%; theeffective interest rate on SMI loans would, however, be in the range of4-8%. In the event that DBP decides to modify its relending rates, theBank would be consulted on the rates to be charged to subborrowers.

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Agreement and Understandings Reached at Negotiations

5.14 During negotiations the Bank reached agreement:

(a) with the Government (recorded in the Loan Agreement) on:

(i) raising of DBP's paid-in capital to P 4.0 billion by 1981(paras. 4.55 and 4.72);

(ii) liquidation of DBP's investments in FTI, NS'C and NHC(paras. 4.55, 4.59 and 4.71);

(iii) arrangements for DBP's handling of Government behestprojects (para. 4.59);

(iv) compensation to DBP for liquidity loss caused bydefaults on loans made at the Government's behest(para. 4.66);

(v) help to DBP in raising additional long-term resources(para. 4.72); and

(b) with DBP (recorded in the Project Agreement) on:

(i) maintenance of the present debt (including guarantees) toequity ratio limit of 10:1 (paras. 4.56 and 5.12);

(ii) measures to avoid foreign exchange risk exposure (para. 4.57);

(iii) submission of audit reports on its accounts within fourmonths of the close of its accounting year (para. 4.60).

(iv) efforts to be exerted to reduce arrears on its portfolio(para. 4.65);

(v) limitation on the use of not more than 10% of the SMI loancomponent for subloans exceeding P 1.5 milLion in Metro-Manila(para. 5.04);

(vi) the free limit for larger industry subprojects at$1.5 million (Dara. 5.10);

(vii) submission to the Bank of monthly reports on SMI loanapprovals, with appraisal reports on all SMI loans overP 500,000 (para. 5.10); and

(viii) size of SMI loans in the range of P 50,000-2.5 mil-lion (para. 5.11);

(ix) maximum individual subloans size limit of $6.0 million forlarge industry subloans (para. 5.11);

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5.15 In addition, during negotiations the Bank reached understanding:

(a) with the Government on the conduct of its deposits with DBP ina manner that would not jeopardize DBP's liquidity;

(b) with DBP on:

(i) DBP's working capital financing policy for SMI and effortsto ensure that relevant SMI loan conditions are translatedinto action (para. 4.13).

(ii) its development strategy (para. 4.14);

(iii) measures to improve the quality of DBP's appraisals includingcalculation of ERR for all industrial loans over $ 500,000and all SMI loans exceeding P 1.5 million and greaterin-depth analysis of the employment impact in its industrialloan appraisals (paras. 4.15 and 4.16);

(iv) reduction in processing time of SMI loan application inDBP's Head Office and Branches (para. 4.17);

(v) adoption of a program for improving supervision of industrialand SMI loans (paras. 4.19 and 4.20);

(vi) use of at least 90% of the SMI loan component for financingsmall, labor-intensive enterprises which create employmentat a cost per job lower than the Bank's urban povertyguidelines ($3600/job); or have fixed assets not exceeding$250,000 at the time of application, the ceiling suggestedin the recent Bank report "Employment Creation and SmallScale Enterprise Development" (para. 5.06); and

Recommendation

5.16 A loan of $80 million is recommended for use by DBP in financingsmall, medium and large productive industrial enterprises in the Philippines.

ANNEX 1Page 1

PHILIPPINES

DEVELOPMENT BANK OF THE PHILIPPINES

Board of Governors as of September 30, 1977

Name Position and Background

Dr. Placido L. Mapa, Jr. Chairman of the Board and Chief ExecutiveOfficer (CEO). Appointed in October 1976.Former Vice-Chairman and CEO of the PhilippineCommercial and Industrial Bank, 1974-76; AlternateExecutive Director, IBRD, 1970-74; ExecutiveDirector, IMF, 1972; Director-General of thePresidential Economic Staff, 1966-70; Undersecre-tary, Department of Finance, 1965/66. Dr. Mapais also currently Alternate Governor, Philippines,of the IBRD.

Jose V. de Ocampo Vice-Chairman and full-time Governor in charge ofsupervising the Industrial Projects Department Iand III and Controller's Office. With DPB since1959, as Special Assistant to the Chairman,Manager of Investment Banking and EconomicResearch Department, and Treasurer prior to beingappointed Governor; Legal Assistant, EvaluationOfficer and Chief of Special Studies, CentralBank, 1955-59.

Jose R. Tengco, Jr. Full-time Governor, supervising the AgriculturalProjects II, Agricultural Plans and Programs,Public Affairs, Information and Special Services,and Branches and Agencies Departments. FormerAssistant Vice-President of the Philippine Bankof Commerce.

Recio M. Garcia Full-time Governor, supervising the AcquiredAssets Management and Community DevelopmentProjects Departments. Former Chairman andPresident, Quezon City Development Bank.

Rafael A. Sison Full-time Governor, supervising IndustrialProjects II, Agricultural Projects I andDevelopment and Rural Banks Departments. Regularstaff member of the World Bank presently on leaveof absence.

Alejandro Melchor Part-time Governor. Executive Director, AsianDevelopment Bank.

ANNEX 1Page 2

Vicente T. Paterno Part-time Governor. Secretary of Industry;Chairman of the Board of Investments; Chairman,

National Development Corporation.

Leon 0. Ty Part-time Governor. Member of the PhilippineBar.

Ruben B. Ancheta Part-time Governor. Presidential Assistant forEconomic Affairs.

AEP Projects DepartmentFebruary 2, 1978

ANNEX 2Page 1

PHILIPPINES

DEVELOPMENT BANK OF THE PHILIPPINES

Statement of Operating Policies and Procedures for Medium-and Large-Scale Industrial Financing /1

1. The policies, criteria and procedures set forth below will guideDBP's medium- and large-scale industrial operations - particularly thoseundertaken by Industrial Projects Department I and irrespective of thesources of funds for financing these operations.

2. Objectives of Industrial Financing. To assist the development ofthe country by providing financial and technical assistance for the estab-lishment of new industries as well as for the balancing, modernization andexpansion of existing industries.

3. Basis for Investment Decisions. DBP will make investment decisionson the basis of sound investment criteria and standards, and after carefulproject evaluation. Financial assistance will be provided to those projectswhich are financially and economically viable and technically feasible, andfor the implementation of which saitsfactory organizational and managerialarrangements have been made.

4. Method of Financing. DBP will provide finance according to therequirements of each project, in one or several of the following forms:

(a) direct loans in local currency, for financing local expenditures onfixed assets and where appropriate for working capital;

(b) direct loans in foreign currencies, for financing imports ofequipment and/or new materials;

(c) guarantees of domestic currency and/or foreign currency creditsmade on suitable terms;

(d) loans fully or partly convertible into stock;

(e) in exceptional and highly meritorious cases, direct equity invest-ments and underwriting of share issues.

5. General Investment Policies

(a) Financing will be provided to projects which are in line withthe investment priorities of the Government; preference beinggiven to projects registered with the Board of Investments (BOI)under the Investment Incentives Act or the Export Incentives Act,or with other pertinent Government regulatory agencies.

/1 Approved by the Board of Governors on May 29, 1974, under ResolutionNo. 1571-A.

ANNEX 2Page 2

(b) In accordance with normal banking practice, adequate security willbe required to cover the loans and guarantees, but the main con-siderations will be the merits of proposed projects, their repay-ment prospects and the soundness of management of the enterprise.

(c) DBP will not seek a controlling interest in any enterprise in whichit has invested, or any other interest which would give it responsi-bility for management, except when in its judgement its investmentis in jeopardy, in which case DBP reserves the option of takingsuch action as may be necessary to protect its interests.

6. Project Appraisal Guidelines

(a) Each investment decision will be made on the basis of a thoroughproject evaluation, reflected in an appraisal report, which willbe a self-contained and comprehensive document outlining facts,analyses and judments on the essential aspects (including tech-nical, marketing, management, financial and economic) of theproject as well as recommendations on special contractual arrange-ments. In appropriate instances, the report will incorporateessential complementary elements of the BOI's appraisal work, inparticular its ecomic evaluation and marketing analysis. Theseinclusions notwithstanding, DBP's appraisal reports will in anyevent include DBP's own judgments on these matters as well.

(b) Project appraisal will generally include the calculation of theinternal, financial and economic rates of return for projects ofwhich the total project cost exceeds US$2 million equivalent. Ifthe economic rate of return is below 10%, speciLal justificationwill be required in the appraisal report which recommends a deci-sion to finance the project.

(c) Each appraisal report will provide in detail the estimated costof the project, including working capital requirements and ade-quate contingencies. Prior to committing its own funds DBP willsatisfy itself that funds expected from sources other than DBP(i.e., borrower's own contribution, plus borrowings from otherlending institutions) will be available in sufficient amounts whenneeded to cover the total financing requirements of the project.

7. Lending Terms

(a) Each industrial loan will be made on a term and with a grace periodconsistent with the repayment capacity of the enterprise based onprojected cash flows, and related to the useful life of the asetsfinanced by the loan.

(b) Each investment project financed by DBP will normally have an equitycapital equivalent to 25% of total project cost. In the case of anexpansion project of an existing enterprise, funds generated inter-nally are considered as equity for this purpose.

ANNEX 2Page 3

(c) DBP will take steps adequate to protect itself against the foreignexchange risk on its lending operations and guarantees.

8. Project Supervision Guidelines. It is the policy of DBP to:(a) undertake systematic follow-up on the progress and operation of theprojects financed by it, in order to establish whether the actual develop-ments correspond with the expectations and projections on the basis of whichthe investment decision was made, and to keep DBP's management currentlyinformed of the project status so that it may take timely and appropriateaction. Accordingly, DBP requires its borrowers to submit regular period-ical reports on the physical and financial progress of the project, and onits operational and financial performance. Furthermore, projects are visitedat appropriate intervals to confirm the state of progress, to check on theefficiency, organization and management of the project, and to discussproblems of mutual concern with the borrower's management; and (b) maintainclose scrutiny of its accounts in arrears. Each individual account inarrears is analyzed in detail at least once annually in order to identify thecauses for arrears and to determine the repayment capacity of the enterprise.On the basis of this analysis, DBP's management takes appropriate measures(including legal action), for collection, rescheduling, or restructuring ofthe account.

AEP Projects DepartmentMarch 1, 1978

ANNEX 3Page 1

PHILIPPINES

DEVELOPMENT BANK OF THE PHILIPPINES

Outline of Industrial Development Strategy for 1978-79

A. Large Industry Financing

1. DBP will continue to endeavor to enhance both its qualitative andquantitative contribution to the Philippine economy. During the Five-YearPlan Period, 1978-82, DBP plans to provide financial assistance to industryfor P 7.7 billion, of which P 2.7 billion including P 1.2 billion in foreignexchange, will be provided in 1978-79. DBP's industry development activitiesin the two-year period, 1978-79, will be concentrated in the specific areasoutlined below.

Project Promotion and Resource Allocation

2. DBP's industrial financing will cover a broad spectrum of the sizesof enterprises with emphasis on relatively smaller and mnedium size enterprises.

3. DBP will intensify its promotional role by providing maximumpossible encouragement to new entrepreneurs especially those located in theeconomically disadvantaged regions of the country. Towards this end, DBPwill provide technical assistance in identification and development of newinvestment opportunities in subsectors and regions not fully developed sofar.

4. DBP will follow the industrial priorities plan for large projectsapproved by the DBP Board on April 5, 1978, which dovetails with the develop-ment program of the National Government. DBP would therefore focus on Boardof Investments and Philippine Overseas Construction Board approved projectsas the principal target market for DBP's financial assistance. Generally,within these priorities those industries will be assisted which meet any orall of the following economic criteria:

(a) Further development of the country's natural resources,including the further processing of these resources.

(b) Beneficial impact on the balance of payment position ofthe country either through exports of manufactured goods orsubstitution of domestic production for imports in an efficientway.

(c) Decentralization of industry out of the Metro-Manila Area byincreasing gradually the amount of loans outside Metro-Manila.

ANNEX 3Page 2

(d) Additional employment opportunities to the country's laborforce at a relatively lower capital investment cost.

5. In its appraisal of projects, DBP will bring out the employmentimpact of new projects and will consider the choice of labor-intensivetechnology wherever possible. To the extent possible, DBP will financeprojects with capital investment per job created not exceeding $15,000.Through its increased use of economic rates of return it will increase theefficiency of resource use in industrial development. DBP will also maintainclose liaison with the Office of the President, the Central Bank, NEDA, theBoard of Investments, Philippine Overseas Construction Board, and othergovernment agencies, in ensuring that DBP's investments take place in linewith the overall Government strategy for the development of Philippineindustry.

Government Loans

6. DBP will continue to make loans or investment at the Government'sbehest when it considers such loans to be financially and economicallyjustified, according to its accepted investment criteria. Behest loans thatdo not meet these criteria will have to be funded by the National Governmentand handled by DBP on an agency basis.

Guarantees

7. DBP will continue to issue guarantees where it considers thismethod of financing to be appropriate. However, it will normally provideguarantees as part of a loan/guarantee package rather than as a separatemeans of assistance. In future, guarantees will be issued only on projectsthat have been fully appraised by DBP, and meet its normal investment criteriafor project acceptance.

Resource Mobilization

8. DBP will strongly endeavor to raise adequate resources from externalsources to meet the demand for such funds. Such sources will include theIBRD and ADB, with additional amounts from commercial foreign exchangeborrowings. Projected borrowings from commercial sources over the two years(1978-79) are about $400 million. DBP plans to mobilize domestic currencyresources amounting to P 1,440 million through issuance of its CountrysideBills. In addition, to the extent possible, DBP will explore new sources ofmobilizing peso resources so as to reduce its dependence on Governmentfunds.

ANNEX 3Page 3

Staff Development

9. DBP will continue to improve its program for its staff handlinglarge industrial loans. This will be done by continuing to send senior staffto courses both overseas and in the Philippines and by instituting its ownIndustrial Evaluation Course, which will be available to appraisal andsupervision staff handling industrial loans.

B. Small and Medium Industries (SMI) Development Program

10. Cognizant of the high economic merits of its SMI developmentprogram, DBP plans to provide financing amounting to E 344 million to about1,000 SMI projects over the next two years, 1978-79. The following strategywill be followed while implementing the SMI financing target so as to achievea maximum development target.

Improvement in Institutional Set-Up

11. DBP will constantly review the organization set up and staffresources of IPD II and the Branches and will take necessary measures to makethem fully responsive to the needs of the SMI sector and more efficient inhandling SMI projects. To the extent possible efforts will be made to keepthe SMI loan processing time within 60 days in the Branches and IPD II.

12. With a view to encouraging maximum utilization of existing SMIproductive capacity, DBP will enhance its working capital financing. Applica-tions for only working capital loans will be entertained not only from export-oriented projects but also from domestic market-oriented projects. DBP willalso ensure that benefits of its liberal policies concerning repayment term,grace period, collateral requirement and sponsors' equity contributions arepassed on to its SMI clients within the limits of prudent: financial andbanking practices.

13. In order to ensure that DBP's SMI investment will generate theexpected economic benefits, DBP will upgrade and intensiEy loan supervisionefforts of IPD II as well as the Branches with emphasis on preventive ratherthan problem solving approach. IPD II will closely monitor the performanceof the Branches in this regard and whenever needed will provide necessaryassistance/guidance through its Regional Assistance Units.

Investment Priorities

14. For its SMI financing program DBP will devise and closely follow anInvestment Priorities Plan which would provide it a rational basis forscreening and selection of investment projects. In every case projectselection would be determined by the relative impact of investments in theeconomy and the project's commercial profitability.

ANNEX 3Page 4

Resource Allocation Criteria

15. In order to ensure optimum economic benefits accrued to the economyfrom its SMI financing, DBP shall follow closely the following strategies:

(a) Industry Dispersal. DBP's SMI financing in regions outsideSouthern Tagalog and Central Luzon would account for at least 50%of DBP's total SMI financing. DBP shall adopt a two-fold approachfor the attainment of this objective, enumerated as follows:

(i) DBP has identified its key Branches which due topotentialities of their regions, may provide thelead for an accelerated regional growth of the SMIsector. IPD II shall thus utilize its SMI AssistanceUnit to upgrade the capability and competence of thesebranches to handle appraisal and supervision of theseprojects to a reasonable level.

(ii) IPD II considers industrial dispersal to be the longterm output of the Nationwide Industrial EstateProgram (NIEP) of the Government. It is for thisreason that for the current year, IPD II will identifyareas of cooperation and involvement with other Govern-ment agencies relative to the setting up of industrialestates in the various regions of the country as a keyelement in the promotion of small and medium industries.NIEP has to date identified thirty-seven (37) industrialparks (exclusive of the mini-industrial estate now underconstruction in Dagat-dagatan, Tondo). Based on theimplementation schedule to be set up by the Government,DBP perceives to be involved in the program by (a) activepromotion of vacant industrial sites to IPD loan appli-cants, coordination with the agency in charge of theestate and continuing liaisons with both parties; and(b) extension of loan facilities to colonizers ofindustrial estates.

(b) Utilization of Local Raw Materials and Energy Conservation. Theseare twin approaches linking areas of vital national concern to theDBP's SMI programs. Adaptability to use of indigenous raw materials,as a logistical consequence of regional dispersal, will remain acriterion for qualifying as an SMI project within the purview of theDBP's SMI programs. Energy conservation, while not previouslygiven due emphasis, is now believed worthy of inclusion among themain thrusts of DBP's SMI programs. Staff studies are presentlyunderway and will be completed towards the formulation of lendingprograms which should provide due cognizance and incentives forthe attainment of these objectives within the context of DBP'sexisting lending programs. For this purpose, IPD II will considera package of incentives for projects which are either users ofindigenous raw materials and projects associated with energyconservation.

ANNEX 3Page 5

(c) Export Promotions, DBP intends to adopt a more assertive rolein promoting export consciousness and undertaking export liaisonwork in 1978-79. As the joint responsibility of the supervisiongroup and plans and programs unit, the Bank's persuasive influenceshall be used to promote membership of mortgagor projects in exportconfederations or chambers. Other promotional efforts includeprovision of export directives and liaison between the smallproducers and the prominent export trading concerns. Under theprogram, DBP shall also promote subcontracting arrangements amongexporters and entrepreneur producers whenever feasible. Subcontrac-ting scheme is envisioned to be strategy for the creation of jobopportunities at a lower capital investment per job. Indirectly,this will assist the DBP's SMI projects by providing them with thenecessary marketing support. The concept of the program revolvesaround DBP granting financial support as well as indirect marketingassistance to SMI projects financed. A comprehensive policy forDBP's Board approval for the special financing program to exporttraders will be submitted in the first half of 1978.

(d) Promotion of Labor-Intensive Industries. With DBP's SMI lendingprogram veering away from capital intensive industries, generationof about 15,000 jobs at a capital to labor ratio of P 27,000:1 isconsidered to be one of DBP's targets for 1978-79. To be guidedby an Investment Priorities Listing of projects to be set up,IPD II anticipates to be more selective in making investments in1978-79. Towards this end, efforts have been already initiatedby DBP to encourage some of the DBP-financed contracting basisto promising entrepreneurs. The Dagat-dagatan mini-industrialestate in Tondo was initially identified to provide the base tosupport the subcontracting scheme. Projects which are basicallylabor-intensive, such as garments or handicrafts manufacturing forexport, shall be the principal target in the strategy. DBP shallthen provide the necessary financial support both to the DBP-borrowerand the subcontractor.

C. Technical Assistance to Smaller Financial Institutions

16. DBP will accelerate its efforts to upgrade thes operational capabilityof smaller development finance institutions in the country (such as privatedevelopment banks). As a first step in this direction ]DBP will set up aDevelopment Training Institute to impart professional training to the managementand staff of the said development finance institutions. Simultaneously, DBPwill increase its financial assistance for PDBs and will continue to helppromote and set up new PDBs in the country especially in regions outsideLuzon.

AEP Projects DepartmentApril 14, 1978

PHILIPPINES

DEVELOPMENT BANK OF THE PHILIPPINES

Structure of Manufacturing Sector by Size of Establishments, 1971 and 1974(in current prices)

Establishments Employment Gross Value Added Labor Productivity1971 1974 1971 1974 1971 1974 1971 1974

Scale No. of workers No. % No. X No. % No. X P million X P million X --- p

Cottage 5-19 8,203 80.1 7,849 73.1 68,209 16.2 67,995 13.0 324 4.4 384 2.5 4,750 5,647

Small 20-99 1,363 13.3 2,031 18.9 56,489 13.4 85,829 16.4 693 9.3 1,424 9.2 12,270 16,591

Medium 100-199 291 2.8 396 3.7 40,222 9.5 53,741 10.2 790 10.6 1,538 10.0 19,640 28,619

Large 200 and above 391 3.8 466 4.3 256,297 60.9 316,279 60.4 5,641 75.7 12,084 78.3 22,010 38,207

Total 10.248 100.0 10.742 100.0 421.217 100.0 523.844 100.0 7.448 100.0 15.430 100.0 17,680 29.455

Source: NCSO.

AEP Projects Department

March 1, 1978

zS

PHILIPPINES

DEVELOPMENT BANK OF THE PHILIPPINES

Present and Projected Staffing Position

Staffing position Changes in professional staff Staffing position Projected staffing positionas of September 30, 1976 Increase Decrease as of August 31. 1977 as of August 31, 1978Prof. Nonprof. Total New Trans. Dept. Trans. Prnf. Nonprof. Total Prof. Nonprof. Total Increase

Office of the Chairman 29 14 43 6 - 3 - 34 15 49 34 15 49 -Legal Department 39 10 49 1 - - - 39 11 50 54 26 80 30Civil Service Office 2 - 2 1 - - - 2 1 3 2 2 4 1Provident Fund 14 4 1S 1 - 2 - 15 4 19 126 4 20 1Auditing Department 79 17 96 - - I - 79 17 96 79 17 96 -Office of the Treasurer 4 3 7 2 - - - 5 A 9 6 5 11 2Securities Management Dept. 37 15 52 7 - 6 - 39 20 59 53 20 73 14Cash & Collateral Mgmt. Dept. 44 25 69 15 - 4 - 50 34 84 54 54 108 24Planning & Control Dept. - - - 6 - - - 3 3 6 5 5 10 4Office of the Comptroller 14 1 15 - - - - 14 1 15 66 4 70 55Accounting Department 26 11 37 3 - - 1 26 14 40 35 25 60 20Electronic Data Processing Dept. 21 27 48 - - 4 - 21 27 48 46 24 70 22Personnel Administration Dept. 44 26 70 14 - 2 - 47 37 84 61 56 117 33General Services Dept. 38 127 165 21 - 8 2 42 144 186 46 161 207 21Medical/Dental Dept 17 3 20 4 - 1 - 20 4 24 23 5 28 4Secretarial Dept. 3 49 52 6 - - - 3 55 58 8 65 73 15

Subtotal Support Staff 411 332 743 87 - 31 3 439 391 830 588 488 1,076 246

Dept. of Dev. & Rural Banks 24 7 31 6 - - 1 26 11 37 67 19 86 49Community Dev. Projs. Dept. 54 12 66 5 - 3 - 56 15 71 106 21 127 56Acquired Assets Mgmt. Dept. 21 20 41 1 - I - 21 21 42 42 28 70 28Agric. Plans & Programs Staff 21 1 22 3 - - 1 22 3 25 33 9 42 17Agricultural Projs. Dept. 1 62 20 82 10 - 4 - 65 27 92 80 29 109 17Agricultural Projs. Dept. II 76 16 92 14 _ 8 - 85 21 106 118 60 178 72Branches & Agencies Dept. I 39 25 64 18 - 3 1 46 29 75 53 33 86 11Branches & Agencies Dept. II - - - 10 - - 1 36 23 59 46 33 79 20Industrial Projs. Dept. 1 79 16 95 4 - 5 1 81 18 99 102 23 125 26Industrial Projs. Dept. II 61 17 78 18 - 3 - 74 22 96 149 28 177 81Industrial Projs. Dept. III 52 11 63 7 - 2 1 57 13 70 134 22 156 86Business Research Dept 18 9 27 6 - 1 - 22 11 33 78 11 89 56Credit Department 25 8 33 3 - i - 25 11 36 42 19 61 25

Subtotal Operation Staff 532 162 694 105 - 31 6 615 225 841 1,050 335 1.385 544

Subtotal Support Staff 411 332 743 87 - 31 3 439 391 830 588 488 1,076 246

Grand Total - Read Office 943 494 1,437 192 _ 62 9 1.055 616 1,671 1.638 823 2,461 790

All Branches 965 722 1,687 66 - 25 - 1,031 799 1.830 1,133 878 2,011 181

Total 1.908 1,216 3.124 258 - 87 9 2.086 1.415 3.501 2,771 1.701 4,472 971

AEP Projects DepartmentMarch 1, 1978

PHILIPPINES

DEVELOPMENT BANK OF THE PHILIPPINES

Characteristics of Subprojects Financed Under IBRD Loan No. 998-PH(As of August 31, 1977)

Annual ForeignTotal DBP financina expected exchange

project Local Rates of return /a Incremental export earnings/ Actual projectName of subproject Industry (project) Location cost IBRD resources Total Financial Economic employment sales savings completion

(P M) ($ N) (P M) (P M) (Z) (Z) (9 M) ($ M)

A. Subpro1ecte above the free limit /bAl Lotus Export Specialists, Inc. Leather goods (shoes) Central Luzon 19.9 1.9 12.9 40 79 400 9.3 3.9 March 1976A2 Pil-Mosaic Corporation Ceramics (mosaic tile) Central Luzon 24.0 1.2 8.2 16.6 14 34 380 3.0 2.5 September 1976A3 Philippine Polyamide Industrial Textiles (nylon filament

Corp. yarn) Southern Luzon 144.1 5.0 35.1 50 58 246 8.8 July 1976A4 Sta. Ines Plywood Corporation Wood products (plywood) Northern Mindanao 30.3 2.6 18.3 35 41 313 6.0 5.8 July 1976A5 Filipinas Synthetic Fiber Corp. Textiles (polyester yarn) Southern Luzon 138.5 5.0 25.0 62.2 40 49 200 7.5 February 1976A6 Golden River Mining Corp. Mining (gold) Bicol 38.2 2.8 18.9 15 27 81 1.8 1.3 NYC*A7 Universal Robina Corp. Textiles (polyester cloth) Metropolitan Manila 100.3 5.0 35.1 22 39 510 10.6 NYCA8 Surigao Coconut Dev. Corp. Food products (coconut oil) Northern Mindanao 50.1 3.1 5.7 27.5 28 14 137 34.9 34.7 NYCA9 Emperor Textile Mills, Inc. Textiles (woven fabrics) Metropolitan Manila 39.3 2.3 16.1 25 12 212 4.6 March 1976AIO Regal Textile Ind., Inc. Textiles (woven fabrics) Southern Luzon 54.5 4.8 33.7 24 11 438 4.0 2.7 NYCAll Mabuhay Vinyl Corp. Petrochemical products Northern Mindanao 219.3 5.0 19.0 65.5 19 17 220 33.3 NYCA12 Ledesma Overseas Shipping Corp. Overseas shipping Metropolitan Manila 56.4 5.0 37.5 13 12 56 2.8 1.5 September 1976

Subtotal 914.9 43.7 57.9 379.4 3_193 61.8 117.2

B. Subproiects below the free limitE1 OESCO International, Inc. Wood products (furniture) Metropolitan Manila 9.5 0.6 4.2 39 136 1.5 1.4 July 1975B2 Machine Tools MEfg. Co. of the

Philippines Machinery (lathes) Metropolitan Manila 10.1 0.4 2.7 5.5 28 187 4.8 June 1976B3 Montilla Manufacturing Corp. Garments Central Luzon 4.6 0.3 0.6 2.5 40 266 3.3 1.2 August 1976B4 Fortunoff (Phil.), Inc. Garments Metropolitan Manila 3.5 0.2 1.0 2.4 50 360 2.6 2.5 June 1976B5 CancelledB6 Wearever Textile Mills, Inc. Textiles (knitted fabrics) Metropolitan Manila 11.5 0.6 2.7 6.9 15 95 1.0 0.4 July 1976B7 Cancelled88 Mariano Azana (Macy Metal Mfg.) Car parts & accessories Metropolitan Manila 5.4 0.3 1.2 3.4 30 8O NYC

B9 Ricor Mills Corporation Rice bran oil mill Eastern Visayas 14.6 0.9 0.7 7.0 12 69 1.4 1.2 NYC

Subtotal 59.2 3.3 8.9 31.9 1.193 9.8 11.5

Total 974.1 47.0 66.8 411.3 4,386 71.6 128.7

/a Economic rate of return is calculated for projects with total project cost of over $2 million.

/b The free limit under this loan is set at US$1 million.

* Not yet completed.

f N;

AEP Projects DepartmentDecember 8, 1977

PHILIPPINES

DEVELOPMENT BANK OF TIHE PHILIPPINES

Characteristics of Subprojects Financed under IBRD Loan No. 1190-PH(As of April 19, 1978)

Total DBP Financing Annualproject Local Rates of return la Incremental expected Foreign exchange

Name of Subproject Industry (Product) Location cost IB8D ADB resources Total Financial Economic employment export sales earnings/savings(P M) (9 M) (08) (PM) (PM) (X) (X) ($M) ($ 1)

A. Subprojecta Above the Free Limit /bAl FC Agro-Development, Inc. Food products (sucro Southern Hindanao 31.4 1.6 4.0 16.0 22 10 258 4.1 3.6

chemical)A2 Wearever Textile Mills Textiles (knitted fabrics) Metropolitan Manila 66.1 2.4 2.4 36.0 16 27 262 6.6 4.3A3 Emperor Textile Mills Textiles (woven fabrics) Metropolitan Manila 62.5 2.7 1.9 34.5 27 10 264 8.1 6.8A4 Businessday Information Printing and publishing Metropolitan Manila 19.1 1.2 1.2 10.2 30 21 71 3.1 2.9

Systems and Services, Inc.A5 Sabena Mining Copper mining Mindanao 226.0 5.0 2.5 55.5 19 17 529 20.4 17.6A6 Hi-Standard Manufacturing. Inc. Synthetic leather Southern Luzon 31.4 1.4 3.4 13.9 35 63 156 8.1 5.9A7 Loadstar Shipping, Inc. Ship 16.0 1.6 12.0 20 26 28AR Refractories Corp. Refractory bricks Northern Luzon 70.9 2.5 2.5 4.8 41.1 25 31 229 1.0 7.5A9 Noroil Mills, Inc. Coconut oil Central Visayas 66.3 2.0 2.5 33.8 23 16 111 23.2 22.7AID Santa Clara Lumber, Inc. Timber Mindanao 49.0 1.9 IB.5/d 33.0 44 51 50R 29.0 29.0All Davao Timber Corp. Particle board Southern Mindanao 80.2 5.0 1.5 48.0 22 13 211 12.9 12.3A12 Republic Cement Plant rehabilitation Central Luzon 20.2 1.0 6.7/d 14.4A13 Mindanao Steel Corp. Galvanized iroc Northern Mindanao 15.1 1.0 7.5 45 11.7A14 Sugarland Agri-Industrial Corp. Cattle feed Western Visaya. 20.1 1.1 4.0/d 12.0 58 77 366 5.7 5.4

Subtotal 774.2 30.4 13.3 42.6 367.9 3.038 122.2 129.7

B. Subprojects Below the Free LimitB1 Mackay Machinery, Inc. Foundry (cast iron) Metropolitan Manila 19.2 0.8 4.0 10.0 18 34 128 3.9 3.9B2 Selectra Electronics Corp. Electronics (radio) Central Luzon 7.9 0.4 0.7 3.7 50 290 5.9 1.3B3 Surigao Development Corp. Wood products Northern Mindanao 12.4 0.5 1.0 4.7 43 167 2.2 2.2B4 Palacio Shipping, lac. Ship Central Visayas 1.9 0.2 1.3 19B5 Machine Tools Mfg. Co. of Industrial machinery Metropolitan Manila 17.7 0.2 7.2 8.7 27 187 1.7 1.7

the Philippines (lathe machines)B6 INGaSCO, Inc. Industrial gas (compressed Metropolitan Manila 5.4 0.3 0.2 2.4 50 13

gases)B7 Philippine Knitting Mills, Inc. Textile (knitted fabrics) Southern Luzon 13.5 0.3 3.7 5.9 15 197 5.2 2.9B8 Central Fermentation Alcohol Central Luzon 5.8 0.2 0.5 2.2 29 30 0.6

Industrial CorporationB9 IGRI Industries, Inc. Industrial/agricultural Metropolitan Manila 6.1 0.2 0.8 2.6 21 120 2.0

machineryB10 La Union Tobacco Redrying Corp. Tobacco redrying Northern Loaon 26.7 0.1 6.3 7.0 56 600/c 1.5 1.4Bl Navotas Industrial Corp. Shipbuilding and repair Metropolitan Manila 9.8 0.9 6.8 22 57B12 Manara Cassava Flour Food products (cassava Western Visayas 12.4 0.6 2.8 7.1 65 151 1.8 1.5

Hill Corp. processing)B13 Philippine Pigment and Chemicals (resins and Southern Luzon 26.1 0.3 10.0 12.0 91 38

Resin Corp. pigments)B14 International Components Polyurethane footwear Metropolitan Manila 12.7 0.1 5.5/d 6.4 30 106 1.8 1.8

Processing Corp. soles

Subtotal 177.6 5.1 42.7 80.8 2.084 24.0 19.3

Total 951.B 35.5 13.3 85.3 448.7 5.122 146.2 149.0

/a Economic rate of return is calculated for projects with total project cost of over $2 million./b The free limit under this loan is set at US$1 million./c Plus 5,000 seasonal jobs./d Parc of $75 million syndicated loan secured by DBP, February 1977.

AEP Projects Department

April 20, 1978

lM

PHILIPPINES

DEVELOPMENT BANK OF THE PHILIPPINES

Features of SMI Subprojects Financed Under IBRD Loan No. 1120-PH by Geographical Distribution(As of August 31, 1977)

DBP financing Average Incremertal employsmentProjects Total cost DBP re- return Investment Incremental sales Averageapproved of project IBTD funds sources on assets cost Export sales Domestic sales Total sales borrower's

No. Z Amount % Amount % Amount Total per project Total per worker Amount Z Amount Z Amount % assets /a($(000) (P 000) X ) ($) --- ------- (P'000) - - ------ …

Region I Ilocos 34 8.3 11,711 5.8 987 6.5 2,466 9,857 6.5 15.9 374 4,234 293 0.5 24,328 6.7 24,621 5.8 294

Region II Cagayan Valley 12 2.9 9,336 4.6 634 4.2 1,583 6,337 4.2 13.2 264 4,782 3,521 5.9 6,157 1.7 9,678 2.3 386

Region III Central Luzon 51 12.4 20,335 10.0 1,534 10.2 3,831 15,320 10.1 16.6 700 3,928 156 0.3 43,368 11.9 43,524 10.3 197

Region IV Metro Manila 159 38.8 86,037 42.2 6,364 42.1 15,916 63,673 42.1 17.4 3,576 3,253 53,493 90.0 158,239 43.4 211,732 49.9 436

Region IV-A Southern Tagalog 33 8.1 15,862 7.8 993 6.6 2,484 9,936 6.6 19.5 410 5,231 180 0.3 27,222 7.5 27,402 6.5 200

Region V Bicol 11 2.7 4,161 2.0 305 2.0 771 3,075 2.0 14.1 339 1,660 - - 16,729 4.6 16,729 3.9 138

Region VI Western Visayas 42 10.2 23,456 11.5 1,723 11.4 4,307 17,222 11.4 44.0 650 4,879 - - 46,820 12.8 46,820 11.0 257

Region VII Central Visayas 19 4.6 10,611 5.2 902 6.0 2,259 9,036 6.0 21.1 513 2,797 1,321 2.2 13,089 3.6 14,410 3.4 357

Region VIII Eastern Visayas 2 0.5 1,170 0.6 87 0.6 216 867 0.6 9.7 44 3,595 - - 1,003 0.3 1,003 0.2 552

Region IX Western Mindanao 8 2.0 3,199 1.6 173 1.1 428 1,713 1.1 11.4 111 3,897 - - 6,176 1.7 6,176 1.5 258

Region X Northern Mindanao 13 3.2 4,549 2.2 355 2.4 889 3,559 2.4 16.8 178 3,455 - - 6,557 1.8 6,557 1.5 569

Region XI Southern Mindanao 19 4.6 8,255 4.1 649 4.3 1,617 6,475 4.3 39.7 243 4,593 505 0.9 9,628 2.6 10,133 2.4 158

Region XII Central Mindanao 7 1.7 4,971 2.4 403 2.6 1,006 4,023 2.7 16.2 134 5,016 - - 5,385 1.4 5,385 1.3 422

Total 410 100.0 203,653 100.0 15.109 100.0 37,773 151,093 100.0 17.7 7.536 3.654 59,469 100.0 364.701 100.0 424,170 100.0 328

/a At the time of loan application to DBP.

EAP Projects DepartmentNovember 18, 1977

s1I

pRILIPPINES

DEVELOPMENT BANK OP THE PHILIPPINES

Pe-ta-o of S0I Snbpro lcts Finaned Usd0r IBRD tans NS. 1190-PN bY Region

(As of August 31, 1977)

Potal cost of DDP financinR Average In,cre.sntsl slV,yenOOt In-rew.ntal sales Averageprojects IBRD foods EBP resources Totni retora as assoe. Invest-ent cost Eptort enlee Domestic as Totl sales borro.eErsAtproved proaects Anounnt At.o.nt An.ount A..o.nt pea project Total per vtorker A-unt : Amonot 2 A-ount 2 -assets LNurber Z (P '000) S ($ '000) X ( '3000) ( '000) Z (M) ($3 - ---- --- …(P '000)----- …

Region I Ilocon 45 It S 12,293 6.0 1,041 7.4 2,603 10,411 7.4 18.2 409 4,064 _ - 16,027 4.4 16,027 3.7 212Regios II Cagayno Volley 6 1.5 1,546 0.6 127 0.9 318 1,273 0.9 12.4 36 5.806 - - 1,576 0.4 1,576 0.4 137Region III Cestrol L-oe 57 14.7 24,719 12.1 1,862 13.2 4,655 18,620 13.2 13.6 778 4,296 777 1.1 45,767 12.6 46,544 10.8 303Region IV MNtro Manila 80 20.6 87,408 42.9 5,063 35.9 12,657 50,627 35.9 13.9 2,072 5,704 54,007 79.7 168,323 46.2 222,330 51.5 671Region IV-A Soothern Tugalog 38 9.8 14,808 7.3 1,177 8.3 2,942 11,769 8.3 13.6 435 4,603 - - 24,248 6.7 24,248 5.6 199Region V Bicol 20 5.1 4,016 2.0 353 2.5 894 3,576 2.5 9.1 534 1,017 - - 21,426 5.9 21,426 5.0 367Regi-o VI Western Visayes 43 11.0 21,326 10.5 1,529 10.0 3,823 15,291 10.8 12.5 549 5,252 - - 23,216 6.4 23,216 5.4 245Region VII Centeal Visnyas 33 8.5 12,629 6.2 926 6.6 2,314 9,258 6.6 12.3 564 3,028 971 1.4 19,873 5.5 20,844 4.0 410Region VIII Eastern Vissyan 8 2.1 5,910 2.9 452 3.2 1,130 4.521 3.2 - 209 3,823 - - 4,257 1.2 4,257 1.0 192Region IX WNestern Miodn.oo 9 2.3 5,622 2.8 504 3.6 1,259 5,036 3.6 10.0 166 4,579 399 0.6 13,282 4.2 15,681 3.6 322Region X Northern Mlid n.o 17 4.4 6,617 3.2 506 3.6 1,267 5,065 3.6 10.0 303 2,953 11,370 16.8 11,443 3.1 22,813 5.3 221Reigon XI Soutbers Midsn..o 19 4.9 4,458 2.2 402 2.8 1,006 4,025 2.8 - 216 2,791 243 0.4 7,111 1.9 7,354 1.7 170Region XII Central Mindanao 14 3.6 2,592 1.3 174 1.2 434 1,736 1.2 - 134 2,615 - - 5,323 1.5 5,323 1.2 145

Total 389 100.0 203.944 100.0 14.121 008.0 35.302 141,208 100.0 14.0 6.405 4,305 67,767 100.0 363_872 100.0 431,639 100.0 353

/ At tims of loan applicatioo to DBP.

RAP Projects DeportmentMves-ber 21, 1977

PHILIPPINES

DEVELOPMENT BANK OF THE PHILIPPINES

Summary of Operations, January 1, 1947 - June 30, 1977(P million)

Cumulative totalFY73 FY74 FY75 FY76 FY77 1947 to 1977

No. Amount No. Amount No. Amount No. Amount No. Amount No. Amount

ApprovalsLoansIndustrial 277 55.2 684 94.9 2,381 750.0 5,895 1,080.4 3,791 1,079.4 30,780 5,614.8Agricultural 12,858 109.5 13,706 120.4 47,203 550.5 64,736 840.9 23,867 510.3 336,772 3,142.5Other 3,874 68.9 4,182 77.7 4,518 1,130.3 5,352 555.9 3,479 423.8 67,941 3,264.7

Subtotal 17,009 233.6 18,572 293.0 54,102 2,430.8 75,983 2,477.2 31,137 2,013.5 435,493 12,022.0

Equity InvestmentsPreferred shares - - 1 5.0 3 97.4 2 40.0 1 68.2 37 567.3Common shares 1 1.0 3 73.5 2 114.4 4 9.3 1 2.7 13 521.5

Subtotal 1 1.0 4 78.5 5 211.8 6 49.3 2 70.9 50 1,088.8

Other investments - _ - - - - 1 35.0 1 39.3 2 74.3

Guarantees /aDomestic currency (P million) 7 16.6 3 12.0 1 50.0 2 14.5 4 26.4 39 157.9Foreign exchange (US$ million) 94 232.7 49 409.1 49 108.5 33 180.3 47 128.8 388 1,921.8

Subtotal (P million) /b 101 1,589.4 52 2,760.0 50 811.2 35 1,354.2 51 978.9 427 14,371.5

Total approval /a 17,111 1,824.0 18,628 3,131.5 54,157 3,453.8 76,025 3,915.7 31,191 3,102.6 435,972 27,556.6

DisbursementsLoans 372.6 330.5 940.0 2,768.8 2,497.9/b n.a.Equity investment 103.0 58.8 147.9 120.3 92.3 n.a.

Subtotal 475.6 389.3 1,087.9 2,889.1 2,590.2

Guarantees issued /aDomestic currency 5 9.6 3 14.5 2 56.0 2 14.5 2 20.2 37 151.7Foreign exchange (US$ million) 77 155.3 46 259.0 38 124.0 34 160.2 43 123.2 355 1,799.4

Subtotal 82 1,059.2 49 1,754.2 40 925.9 36 1,205.0 45 931.6 392 13,460.1

Advances on guarantees 442.9 323.4 375.2 322.3 334.0

/a Cumulative totals are shown net of cancellations whereas yearly figures are not.Exchange rate applied: US$1.00 - P 6.759 for FY73

= P 6.717 for FY74= P 7.0155 for FY75= P 7.431 for FY76= P 7.396 for FY77

4

/b Includes P 4.4 million subscription to Private Development Bank stocks.

AEP Projects DepartmentDecember 8, 1977

PHILIPPINES

DEVELOPNENT BANK OF THE PHILIPPINES

Characteristics of Loans Approved, January 1, 1947 - June 30. 1977(P million)

Cumulative total

FY73 FY74 FY75 FY76 FY77 1947-77

No. Amount X No. Amount % Noo. Amount % No. Amount % No. Amount % No. Amount X

Types of LoansIndustrial 277 55.2 23.6 684 94.9 32.4 2,381 750.0 30.9 5,895 1,080.4 43.6 3,791 1,079.4 53.7 30,780 5,614.8 46.7

Agricultural 12,858 109.5 46.9 13,706 120.4 41.1 47,203 550.5 22.6 64,736 840.9 34.0 23,867 510.2 25.3 336,772 3,142.5 26.1

Real estate 3,437 38.3 16.4 3,834 33.7 11.5 4,340 1,057.4 43.5 5,125 448.0 18.1 3,296 294.6 14.6 64,540 2,509.5 20.9

Government projects /a 8 4.9 2.1 10 13.6 4.6 16 34.1 1.4 20 57.2 2.3 27 73.1 3.6 747 340.8 2.8

Private development banks /b 79 12.6 5.4 77 17.4 5.9 87 29.0 1.2 126 39.8 1.6 118 49.7 2.5 1,038 285.8 2.4

Rural banks Lc 350 13.1 5.6 261. 13.0 4.5 75 9.8 0.4 81 10.9 0.4 38 6.5 0.3 1,616 128.6 1.1

Total 17,009 233.6 100.0 18,572 293.0 100.0 54,102 2,430.8 100.0 75,983 2,477.2 100.0 31,137 2,013.5 100.0 435.493 12,022.0 100.0

Size DistributionBelow P 50,000 16,409 93.8 40.2 17,872 93.7 32.0 52,906 300.3 12.4 74,263 612.1 24.7 29,388 343.7 17.1 413,302 2,599.7 21.7

50,000- 100,000 276 21.1 9.0 271 20.7 7.1 384 29.5 1.2 402 33.4 1.3 558 46.4 2.3 5,261 401.0 3.3

100,000- 200,000 186 28.6 12.2 206 30.5 10.4 315 46.0 1.9 559 86.8 3.5 564 82.9 4.1

200,000- 500,000 103 33.4 14.3 156 50.4 17.2 271 86.4 3.6 410 135.7 5.5 344 112.3 5.6

500,000-1,000,000 20 16.3 7.0 36 26.3 9.0 105 81.7 3.3 154 114.7 4.6 118 87.1 4.3 } 7,559 8,323.1 69.2

1,000,000-2,000,000 3 3.5 1.5 16 21.5 7.3 45 82.8 3.4 74 109.3 4.4 98 186.7 9.3

2,000,000-5,000,000 11 31.9 13.7 14 40.5 13.8 17 63.0 2.6 77 242.0 9.8 27 112.7 5.6

Above P 5,000,000 1 5.0 2.1 1 9.4 3.2 59 1,741.1 71.6 44 1,143.2 46.2 40 1,041.7 51.7Unclassified loans - - - - - - - - - - - - - - - 9,371 698.3 5.8

Total 17,009 233.6 100.0 18.572 293.0 100.0 54,102 2,430.8 100.0 75,983 2,477.2 100.0 31,137 2,013.5 100.0 435.493 12,022.0 100.0

Geographical DistributionManila 167 34.1 14.6 285 46.4 15.8 1,819 1,332.3 54.8 1,575 596.8 24.1 409 391.4 19.4 32,320 4,268.6 35.5

Ilocos and Mt. Province 430 7.7 3.3 399 10.7 3.6 654 99.3 4.1 2,647 55.4 2.2 861 73.6 3.7 7,877 308.0 2.6

Cagayan Valley and Batanes 1,270 12.0 5.1 1,546 14.3 4.9 3,895 42.8 1.8 5,782 112.0 4.5 3,092 68.0 3.4 33,788 338.4 2.8

Central Luzon 4,173 39.8 17.0 5,135 62.6 21.4 12,719 200.5 8.3 15,420 300.9 12.1 5,107 359.1 17.8 75,817 1,643.7 13.7

Southern Luzon 1,531 23.0 9.9 1,348 31.0 10.6 5,190 250.6 10.3 7,939 267.9 10.8 2,705 128.1 6.4 42,163 1,011.3 8.4

Bicol and Masbate 1,110 9.5 4.0 1,001 10.2 3.5 2,760 102.6 4.2 6,131 63.1 2.6 819 26.8 1.3 29,659 377.9 3.1

Western Visayas 2,217 34.5 14.8 1,856 27.5 9.4 4,030 81.1 3.3 5,367 172.0 6.9 3,219 155.8 7.7 53,392 926.7 7.7

Eastern Visayas 1,747 23.2 9.9 2,112 34.1 11.6 6,138 91.2 3.8 9,750 168.0 6.8 3,491 101.7 5.1. 41,713 689.4 5.7

Northern Mindanao 1,655 15.3 6.6 1,784 23.6 8.1 6,755 122.4 5.0 6,698 494.3 20.0 1,970 472.1 23.4 37,497 1,383.8 11.5

Southern Mindanao 2,709 34.5 14.8 3,106 32.6 11.1 10,142 108.4 4.4 14,674 246.8 10.0 9,464 237.0 11.8 81,267 1,074.1 8.9

Total 17,009 233.6 100.0 18,572 293.0 100.0 54.102 2,430.8 100.0 75.983 2,477.2 100.0 31,137 2,013.5 100.0 435.493 12,022.0 100.0

/a Including landed estate financing.

/b Subscriptions to capital stock, rediscounts and time deposits to private development banks.

/c Subscriptions to capital stock and loans to rural banks, these operations are carried out by DBP on

behalf of the Central Bank and are shown on this table as a matter of record only. a x

AEP Projects DepartmentDecember 8, 1977

ANNEx 4

PHILIPPINES

DEVELOPMENT BANK OF THE PHILIPPINES

Characteristics of Industrial Loans. orroved. January 1. 1947 - June 30. 1977

(P million)

Cumulative totalFY73 FY74 F275 PY76 FY77 1947-77

No. Amt. 2 No. Amt. 2 No. Ant. X No. Amt. X No. Art. 7 No. Ant. 7

Seetoral DistributionFood manufacturimg 13 7.7 13.9 18 10.8 11.4 105 30.5 4.1 215 33.8 3.1 169 39.2 3.6 1,398 414.4 7.4

Rice and corn industry /a - - - - - - - - - - - - - - - 4,024 332.4 5.9

Beverage industries - - - - - - 4 0..5 0.1 7 0.5 - 6 0.2 0.1 57 19.5 0.3

Coconut products 1 0.3 0.6 - - - 9 90.1 12.0 8 14.8 1.4 5 46.2 4.3 63 164.2 2.9Tobacco menfiactnre - - - 1 2.3 2.4 - - - - - - - - - 33 30.9 0.6

Textiles, cordage and twine 3 0.4 0.7 3 2.7 2.8 28 171.6 23.2 40 73.8 6.8 9 91.0 8.4 227 694.9 12.4

Apparel and other finished products 1 0.3 0.5 18 6.3 6.6 77 23.2 3.1 88 14.2 1.3 92 11.7 1.1 3.646 94.5 1.7

Lumber and weed products I1 .8 3.3 2 1.0 1.1 7 19.4 2.6 10 12.9 1.2 13 34.3 3.2 242 160.8 2.9

Fernitare and fistere sansfacture 9 1.2 3.2 16 3.0 3.2 73 12.9 1.7 101 10.7 1.0 54 8.9 0.8 884 54.8 1.0

Paper and paper productn - - - - - - 3 0.3 - 3 1.2 0.1 2 0.8 0.1 76 73.2 1.3

Printing, peblihing and alliedinduntries 4 0.5 0.9 2 0.4 0.4 11 1.4 0.2 36 12.4 1.2 32 18.2 1.7 491 67.8 1.2

Leather and leather products 4 0.8 1.4 12 2.8 3.0 21 16.7 2.2 33 7.1 0.7 20 16.8 1.3 651 68.7 1.2

Rubber products 1 0.2 0.4 2 0.9 0.9 4 1.0 0.1 3 0.6 - 6 7.6 0.7 57 30.6 0.5

Chenicals and chemical products - - - 1 0.4 0.4 19 31.8 4.2 26 101.1 9.4 21 24.5 2.3 284 245.0 4.4Petroleum and conl - - - - - - - - - I 0.1 - 1 1.5 0.1 4 15.0 0.3

Nonnetallic prod-cts 40 16.5 29.9 31 32.1 33.8 42 43.8 5.8 103 22.8 2.1 102 133.8 12.4 641 431.0 7.7

Metal induntries 2 0.6 1.1 6 1.7 1.8 24 7.5 1.0 57 21.3 2.0 34 30.3 2.8 562 267.2 4.7

Machinery (other than electrical) 10 1.3 2.7 23 4.8 5.1 27 9.2 1.2 20 12.7 1.2 37 9.4 0.8 302 69.4 1.2

Electrical machinery and apparatus 2 0.2 0.4 3 0.3 0.3 20 17.7 2.4 35 9.6 0.9 24 19.1 1.8 514 122.1 2.2

Transportation eqnip. manufacturicg 16 2.4 4.3 7 4.2 4.4 49 8.6 1.1 100 37.8 3.5 115 25.5 2. 4 1,517 107.2 1.9

Other -annfacturlng industries 12 4.4 8.0 7 1.3 1.4 16 1.7 0.2 14 13.2 1.2 217 26.4 2.4 650 66.2 1.2

F.tracti-s industries /b 6 1.7 3.1 1 0.4 0.1 1S 20.7 2.8 44 333.8 30.9 24 429.5 39.8 791 906.3 16.1

Phblic utilities and services(i-c. shipping) 11 13.9 25.z 28 16.4 17. ._249 236.7 31.6 4,284 342.5 31.7 1,993 97.7 9.1 11,063 1,162.8 20.7

Cottage cnduotrien 35 0.4 .0.' 110 1.4 1.5 578 2.7 0.4 669 3.5 0.3 815 6.8 0.6 2,603 15.9 0.3Small iodustries /c 106 0.4 0.7 393 1.7 1.8 - - - - - - - - - - - -

Total 277 55.2 100.0 684 94.9 100.0 2.381 750.0 1OO.0 5.895 1.080.4 100.0 3,791 1.079.4 100.0 _0,780 5.614.8 100.0

Geographical DistributionManila 62 16.8 30.4 128 33.4 35.2 251 277.2 37.0 227 331.0 30.6 188 252.1 23.4 6,891 2,301.9 41.0

Ilcor and Mt. Province 14 1.2 2.2 119 3.6 3.8 63 3.3 0.4 317 14.0 1.3 255 14.9 1.4 1,094 57.4 1.0

Cagayan Valley and Batanes 12 2.5 4.5 29 1.3 1.4 283 4.7 0.6 347 4.3 0.4 124 3.8 0.4 1,193 43.4 0.8

Central Learn 33 6.6 11.9 63 23.4 24.7 622 69.5 9.3 1,620 67.5 6.2 803 182.0 16.9 6,593 736.0 13.1

Southern Leson 24 2.4 4.4 97 6.5 6.8 280 168.7 22.5 686 80.3 7.4 266 22.2 2.0 2,790 365.4 6.5Bicol and Mashate 7 0.2 0.4 34 1.8 1.9 86 58.0 7.7 251 14.6 1.4 160 7.3 0.7 1,367 138.1 2.4

Western Visayas 10 0.9 1.6 20 4.2 4.4 178 27.0 3.6 401 70.7 6.5 271 45.6 4.2 1.769 273.3 4.9

Eastern Visayan 72 8.2 14.9 105 7.2 7.6 202 39.0 5.2 592 56.8 5.3 380 35.6 3.3 2,764 279.4 5.0

Northern Mindanao 13 1.1 2.0 35 7.4 7.8 149 74.2 9.9 571 401.5 37.2 265 432.4 40.0 2,085 1,076.8 19.2

Southern Mindanao 30 15.3 27.7 54 6.1 6.4 267 28.4 3.8 883 39.7 3.7 1,079 83.5 7.7 4,234 343.1 6.1

Total 277 55.2 100.0 684 94.9 100.0 2.381 750.0 100.0 S,895 1,080.4 100.0 3.791 1,079.4 100.0 30,780 5.614.0 100.0

Sine DistributionBelow H 50,000 181 1.4 2.5 541 3.6 3.8 2,039 14.4 1.9 5,472 48.4 4.5 3,301 38.4 3.6 25,028 Z19.5 4.0

50,001- 100,000 19 1.4 2.5 24 1.9 2.0 91 6.9 0.9 97 7.5 0.7 148 12.0 1.1 1,594 123.0 2.2

100,001- 200,000 23 3.7 6.7 26 4.0 4.2 58 8.8 1.2 56 8.6 0.8 151 21.1 2.0 5

200,001- 500,000 35 13.3 24.1 52 19.0 20.0 83 27.9 3.7 112 38.0 3.5 80 27.9 2.6 5

500,001-l,000,00 11 9.8 17.8 17 13.0 13.7 46 37.0 4.9 57 43.0 4.0 24 17.8 1.6 5 2,930 4,817.1 65.71,000,001-2,000,000 - - - 11 15.1 15.9 27 52.9 7.1 35 52.3 4.8 50 100.9 9.3 32.000,0(1l-5,000,000 7 25.6 46.4 13 38.3 40.4 7 27.6 3.7 48 154.3 14.3 12 48.8 4.5 3

Above P 5,000,000 1 - - - - - 30 574.5 76.6 18 728.3 67.4 25 812.5 75.3 1,228 455.2 8.1

Total 277 55.2 180.0 684 94.9 100.0 2.381 750.0 100.0 5.895 1,080.4 100.0 3.791 1,079.4 100.0 30,780 5,614.8 100.0

/a Since September 1972, loans for the rice and core industry are classified as agricolturel leans.

/b Includes loans for deep-sea fishing up to September 1972; these loans are now classified as agricultural loans.

/c After 1974, sall industry loans were classified by sector.

AEP Projects DepartmentDOcehber 8, 1977

PHILIPPINES

DEVELOPMENT BANK OF THE PHILIPPINES

Distribution of Industrial Loans Approved by Purpose, FY73 to FY77(In thousand pesos)

FY73 FY74 FY75 FY76 FY77

Amount % Amount % Amount % Amount % Amount %

Construction and repair of factoriesor office buildings 12,257 22 21,931 23 90,026 12 152,669 14 80,149 7

Purchase, installation and repair ofmachinery and equipment 19,546 35 27,871 29 440,101 58 270,940 25 352,010 33

Operating and working capital 6,072 11 12,041 13 31,555 4 39,905 4 126,491 12

Liquidation of existing indebtedness 14,245 26 30,112 32 12,989 2 323,547 30 416,589 39

Purchase of site 55 - 373 - 4,530 1 12,227 1 3,772 -

Purchase and repair of fishing equipment /a 283 1 - -} {- -

Purchase and repair of conveyances 981 2 2,248 2 } { 99,737 9

Purchase of raw materials 803 1 83 - } 170,784 23 281,156 26 { 622 -

Others 963 2 264 - } { 107 -

Total 55,205 100.0 94,923 100.0 749,985 100 1,080,444 100 1,079,477 100

/a Classified under agricultural loans since Spetember 1972.

AEP Projects DepartmentDecember 8, 1977

ox

PHILIPPINES

DEVELOPMENT BANK OF THE PHILIPPINES

Summary of Home Industry and SMI Loan Approvals, FY74-77(P' 000)

FY74 /a FY75 /a FY76 FY77Number Z Amount % Number % Amount % Number % Amount % Number % Amount %

Home Industry Loans(P 50,000 and below)IPD II 99 42.7 1,028 2.3 167 38.1 3,043 2.9 209 11.9 3,544 2.1 102 9.0 2,655 1.7Branches 23 9.9 625 1.4 17 3.9 568 0.5 1,257 71.6 23,847 13.9 657 57.7 14.835 9.3

Subtotal 122 52.6 1,653 3.7 184 42.0 3,611

3.4 1,466 83.5 27,391 16.0 759 66.7 17,490 11.0

Small Industry Loans(P 50,001 - P 800,000)IPD II 51 22.0 16,395 37.2 128 29.2 24,649 23.2 143 8.1 32,673 19.0 131 11.5 24,078 15.1Branches 47 20.3 10,788 24.5 84 19.2 20,283 19.1 92 5.2 26,257 15.3 200 17.6 31,464 19.7

Subtotal 98 42.3 27,183 61.7 212 48.4 44,932 42.3 235 13.3 58,930 34.3 331 29.1 55,542 34.8

Medium Industry Loans(Over P 800,000)IPD II 11 4.7 14,222 32.3 33 7.5 44,869 42.2 39 2.2 62,791 36.5 35 3.1 67,464 42.2Branches 1 0.4 1,000 2.3 9 2.1 12,980 12.2 15 0.9 22,770 13.2 13 1.1 19,254 12.1

Subtotal 12 5.1 15,222 34.6 42 9.6 57,849 54.4 54 3.1 85,561 49.7 48 4.2 86,718 54.3

Total SMI Loans(2 + 3)IPD II 62 26.7 30,617 69.5 161 36.8 69,518 65.3 182 10.4 95,464 55.5 166 14.6 91,542 57.3Branches 48 20.7 11,788 26.8 93 21.2 33,263 31.3 107 6.1 49,027 28.5 213 18.7 50,718 31.7

Subtotal 110 47.4 42,405 96.3 254 58.0 102,781 96.6 289 16.5 144,491 84.0 379 33.3 142,260 89.0

All Loans(1 + 2 + 3)IPD II 161 69.4 31,645 71.8 328 74.9 72,561 68.2 391 22.3 99,008 57.6 268 23.6 94,197 59.0Branches 71 30.6 12,413 28.2 110 25.1 33,831 31.8 1,364 77.7 72,874 42.4 870 76.4 65,553 41.0

Subtotal 232 100.0 44,058 100.0 438 100.0 106,392 100.0 1,755 100.0 171,882 100.0 1,138 100.0 159,750 100.0

/a Excludes home industry loans approved by branches within their discretionary authority.

EAP Projects DepartmentNovember 10, 1977

PHILIPPINES

DEVELOPMENT BANK OF THE PHILIPPINES

Characteristics of SMI Loaus b Regions, Size and Purpose of Loans. FY74=77(P '00)

FY74 ____ FY75 FY76 FY77Number % Amount 8 Number Amount v Number % Amount % Number % Amount %

REGIONS

Region I - Ilocos andMountain Province 3 2.7 3,199 7.4 10 3.9 2,938 2.9 18 6.2 8,023 5.6 33 8.7 9,555 6.7

Region II - Cagayan Valley 3 2.7 1,171 2.8 11 4.3 2,894 2.8 5 1.7 1,059 0.7 5 1.3 1,684 1.2Region III - Central Luzon 11 10.0 3,203 7.5 35 13.8 14,191 13.8 31 10.7 18,403 12.7 53 14.0 15,597 11.0Region IVA- Southern Luzon 7 6.4 4,088 9.6 16 o.3 9,801 9.5 24 8.3 12,908 8.9 38 10.0 6,675 4.7Region IV - Metro Manila 46 41.8 19,535 46.0 114 44.9 42,139 41.0 121 41.9 51,291 35.5 112 29.5 70,103 49.2Region V - Bicol and Masbate 5 4.6 1,469 3.6 15 .. 9 5,612 5.5 8 2.8 2,509 1.7 14 3.7 1,956 1.4Region VI - Western Visayas 9 8.2 1,783 4.2 11 4. 2,450 2.4 30 10.4 16,037 11.1 31 8.2 6,746 4.7Region VII - Central Visayas 10 9.1 4,907 11.6 8 3.2 6,396 6.2 12 4.2 13,874 9.6 42 11.1 10,518 7.4Region VIII - Eastern Visayas 3 2.7 583 1.4 4 1.6 2,786 2.7 4 1.4 4.174 2.9 6 1.6 1,710 1.2Region IX - Western Mindanao 1 0.9 275 0.7 9 3.5 2,779 2.7 5 1.7 1,299 0.9 10 2.6 3,926 2.8Region X - Northern Mindanao 3 2.7 243 0.6 8 3.2 2,428 2.4 9 3.1 3,619 2.6 16 4.2 9,998 7.0Region XI - Southern Mindanao 4 3.6 840 2.0 10 3.9 5,150 5.0 18 6.2 9,862 6.8 12 3.2 2,417 1.7Region XII - Central Mindanao 5 4.6 1,109 2.6 3 1.2 3,217 3.1 4 1.4 1,433 1.0 7 1.9 1,375 1.0

Total 110 100.0 42,405 100.0 254 100.0 102,781 100.0 289 100.0 144,491 100.0 379 100.0 142,260 100.0

SIZE OF LOANS

P 50,001 - P 100,000 22 20.0 1,865 4.4 84 33.1 6,375 6.2 84 29.1 6,488 4.5 127 33.5 10,449 7.3100,001 - 500,000 67 60.9 19,097 45.0 116 45.7 30,662 29.8 124 42,9 34,847 24.1 194 51.2 38,992 27.4500,001 - 800,000 9 8.2 6,221 14.7 12 4.7 7,895 7.7 27 9.3 17,595 12.2 10 2.6 6,101 4.3Over P 800,000 12 10.9 15,222 35.9 42 16.5 57,849 56.3 54 18.7 85,561 59.2 48 12.7 86,718 61.0

Total 110 100.0 42,405 100.0 254 100.0 102,781 100.0 289 100.0 144.491 100.0 379 100.0 142.260 100.0

AVERAGE SIZE OF LOANS

Small industry loans 277.38 221.94 250.77 167.80Medium industry loans 1,268.50 1,377.36 1,584.46 1,806.63Overall SMI loans 385.50 404.65 499.97 375.36

PURPOSE OF LOANS

Purchase of site 16 14.5 1,085 2.6 36 14.2 2,900 2.8 27 9.3 2,772 1.9 51 13.5 2,923 2.1Construction of factory and

office building 87 79.1 11,891 28.0 177 69.7 32,910 32.0 210 72.7 33,692 23.3 268 70.7 39,480 27.7Purchase, installation and

repair of machinery andequipment 108 98.2 22,394 52.8 216 85.0 48,370 47.1 248 85.8 78,469 54.3 344 90.8 58,478 41.1

Purchase and repair ofconveyances 39 35.5 2,202 5.2 101 39.8 7,133 6.9 127 43.9 15,200 10.5 120 31.7 15,451 10.9

Liquidation of existingindebtedness 1 0.9 13 - 1 0.4 1,383 1.4 2 0.7 516 0.4 - - 75 0.1

Operating and working capital 76 69.1 4,820 11.4 171 67.3 10,085 9.8 202 69.9 13,842 9.6 307 81.0 25,853 18.1

Total 110- 100.0 42,405 100.0 254/ 100.0L8102.781 100.0 289/ 1 0 0 0. 1 4 4 , 4 9 1 100.0 3 7 9 /a 100 0/al42 260 100.0

/a Individual numbers and percentages do not add up to the total because of multipurpose loans.

EAP Projects Department 4cNovember 10, 1977

PHILIPPINES

DEVELOPMENT BANK OF THE PHILIPPINES

Characteristics of SMI Loans by Industry. FY74-77

FY74 FY75 FY76 FY77 Loans outstanding as of June 30. 1977 /aIndustry Number % Amount % Number % Amount Z Number Z Amount % Number % Amount Z Number % Amount %

Food manufacturing andbeverage industry 11 10.00 3,197 7.54 42 16.54 15,924 15.49 32 11.07 10,456 7.24 71 18.73 20,233 14.22 193 12.74 31,554 8.25

Coconut products and itspreparation 1 0.91 80 0.19 3 1.18 2,765 2.69 2 0.69 2,350 1.63 1 0.26 150 0.11 15 0.99 4,997 1.31

Tobacco manufacture 1 0.91 2,300 5.42 - - - - - - - - - - - - 1 0.07 2,185 0.57Textile, apparel, twine,

cordage and otherfinished products 11 10.00 4,687 11.05 33 12.99 20,425 19.87 20 6.92 11,863 8.21 41 10.82 11,121 7.82 135 8.91 33,599 8.79

Lumber, wood products,furniture and fixturesmanufacture 16 14.55 4,631 10.92 31 12.21 8,801 8.56 28 9.69 10,457 7.24 48 12.67 14,193 9.98 178 11.75 33,698 8.PL

Manufacture of paper andpaper products 1 0.91 500 1.18 5 1.97 686 0.67 3 1.04 1,195 0.83 3 0.79 896 0.63 11 0.73 2,669 0.70

Printing, publishing andallied industries 3 2.73 556 1.31 7 2.76 1,251 1.22 16 5.54 8,264 5.72 15 3.96 8.808 6.19 88 5.81 23,396 6.12

Manufacture of leatherproducts 8 7.27 2,719 6.41 10 3.94 3,131 3.05 11 3.81 3,131 2.17 16 4.22 5,200 3.65 66 4.36 13,902 3.64

Manufacture of chemicalsand chemical products 3 2.73 970 2.29 4 1.57 2,874 2.80 13 4.50 13,856 9.59 14 3.69 14,162 9.95 83 5.48 35,750 9.35

Manufacture of productsof petroleum and coal - - - - - - - - - - - - 2 0.53 3,000 2.11 1 0.07 85 0.02

Rubber products 3 1.29 1,903 4.32 4 1.57 965 0.94 3 1.04 938 0.65 3 0.79 1,088 0.76 16 1.05 4,510 1.18Manufacture of non-

metallic products 7 6.36 1,576 3.72 19 7.48 4,831 4.70 19 6.57 4,834 3.34 40 10.55 9,941 6.99 89 5.87 16,895 4.42Metal industries 6 5.44 1,002 2.36 9 3.54 5,272 5.13 12 4.15 6,634 4.59 23 6.07 17,955 12.62 119 7.85 34,446 9.01Manufacture of mechanical

equipment, accessories,parts, electricalmachinery;^ appliances,etc. 12 10.91 3,873 19.13 35 13.78 12,272 17.94 43 14.88 18,334 12.69 43 11.35 9,289 6.53 140 9.24 34,162 8.93

Ice plant and cold storage 13 11.82 9,710 22.90 18 7.09 11,771 11.45 22 7.61 29,469 20.39 10 2.64 4,240 2.98 82 5.41 39,195 10.25Manufacture of trans-

portation equipmentand repair 2 1.82 373 0.88 4 1.57 2,589 2.52 14 4.84 3,773 2.61 23 6.07 9,234 6.49 125 8.25 31,075 8.13

Extractive industries 2 1.82 1,380 3.26 13 5.12 6,317 6.14 41 14.19 15.379 10.64 18 4.75 8,445 5.94 87 5.74 24,004 6.28Miscellaneous manufacturing

industries 10 9.09 2,948 6.95 17 6.69 2,907 2.83 10 3.46 3,558 2.46 8 2.11 4,305 3.03 86 5.68 16,285 4.26

Total 110 100.00 42,405 100.00 254 100.00 102,781 100.00 289 100.00 144.491 100.00 379 100.00 142.260 100.00 1,515 100.00 382,407 100.00

/a Excluding accounts carried by 9 branches.

EAP Projects DepartmentNovember 10, 1977

ANNEX 4T-14

PHILIPPINES

DEVELOPMENT BANK OF THE PHILIPPINES

Characteristics of SMI Loans Approved in FY1976 and FY1977

By Nature, Size of Borrowers' Assets and Duration of Loans

(R' 000)

FY1976 FY1977

No. % Amount % No. % Amount %

Nature of LoansNew capacity 241 83.4 121,081 83.8 97 25.6 41,920 29.5

Expansion 41 14.2 22,157 15.3 272 71.8 98,242 69.0

Balancing, etc. 7 2.4 1,253 0.9 10 2.6 2,098 1.5

Total 289 100.0 144,491 100.0 379 100.0 142,260 100.0

Size of Borrowers' Assets /a

P 100,000 and below 114 39.5 22,615 15.6 166 43.8 18,965 13.3

P 100,001 to P 500,000 118 40.8 58,211 40.3 147 38.8 39,974 28.1

P 500,001 to P 1.0 million 33 11.4 29,878 20.7 23 6.1 16,914 11.9

Over E 1.0 million 24 8.3 33,787 23.4 43 11.3 66,407 46.7

Total 289 100.0 144,491 100.0 379 100.0 142,260 100.0

Duration of LoansUp to 2 years - - - - 2 0.5 499 0.4

Over 2 to 5 years 34 11.8 19,108 13.2 59 15.6 30,044 21.1

Over 5 to 7 years 28 9.7 9,074 6.3 30 7.9 7,324 5.1

Over 7 to 10 years 227 78.5 116,309 80.5 288 76.0 104,393 73.4

Total 289 100.0 144,491 100.0 379 100.0 142,260 100.0

Average DurationBy number 7.5 years 7.6 years

By amount 7.6 years 7.7 years

/a Size of borrowers' assets at the time of application.

EAP Projects DepartmentNovember 10, 1977

ANNEX 4T-15

PHILIPPINES

DEVELOPKENT BANK 0P THE PHILIPPINES

Suserleed Nelse. Sheets. June 30. 1973 - 1977(P illiSn)

1973 1974 1975 1976 1977

ASSETSCurret Asse ts

Cash and due fros bank. 105.6 117.1 406.2 311.1 190.0

Hrlketublr s-coiti.s 133.7 400.8 486.6 970.8 1,508.1

Short-ter- advances. 5.3 66.3 95 41.4 36.8tntereut receivable 4.3 10.3 33. 30.3 46.7

Alcoonta I.cetable 58.0 99.9 126.1 79.3 222.1Current pumice of Inn-teen loans /5 371.9 303.7 440.8 493.7 493.2

Tonal Correct Aaertu 731.8 997.1 1.588.5 1.926.6 2.516.9

Locu-Te.s Portfolio:

Loans I adva nnogrtcultural loans 567.8 623.9 954.6 1,652.7 2,034.3

tudnetninl lonue 1,373.5 1,335.8 2,067.4 3,130.4 4,415.6Real curate ISone 140.9 166.4 353.4 1,216.4 1,808.3

Goverceant 6 landed estate, etc. 49.7 58.8 69.6 104.6 155.6

Advance on guarantees 1,066.6 786.9 549.4 473.5 357.9

Contract nt gage recelvahla 27.8 28.6 27.1 108.6 194.6Privarn developent banks 31.9 35.0 51.6 71.9 88.3

Total loans 4 advances 3,258.2 3,035.6 4.072.1 6.758.1 9.054.5

Lena: ptrvielois - - - (71.1) (23.4)current partiln (371.9) (303.7) (440.8) (493.7) (493.2)

Total leans Advances (net) 2,886.3 2,731.9 3,631.3 6,193.3 9,437.3

Inocuneente:Equity - preferred 266.5 243.3 255.6 319.0 318.1

- couno 148.0 163.1 281.2 402.8 480.1Beude 74.5 74.0 30.6 69.9 105.4

Total ieveetnets 499.0 492.4 367.4 790.6 903.6Lose: p-ivlistne - - - (3.0) (4.2)

Total i-vestnts (ncr) 489.0 482.4 567.4 787.6 899.4

Total lure-tens cortfolio 3.375.3 3,214.3 4,198.7 6,980.9 8,985.9

Fixed ns.et, (net) 54.1 61.4 65.1 68.4 77.0

Oth-e AneeteProperty acquired thro-nt foreclosure 159.7 724.7 1,143.7 1,139.0 1,093.4

,eee: pr_ulei..s - - - (39.3) (44.5)Loans under litigari.. 83.7 92.0 63.5 49.1 193.9

Othe._ 174.0 199.9 778.4 964.0 1,027.3

Total Other Ausere 417.4 1,006.6

1,985.6 2,111.8 2,260.1

TOTAL ASSETS 4.578.6 5,279.4 7,837.9 11.087.7 14,291.3

LSAOILITIES A8D EQUITT

OnPoein 446.4 618.9 1,974.3 3,697.2 3,426.5Lene: depuelte cub jact no rllover (365.91 (466.0) (1,879.4) (3,019.0) (2,926.5)

Shct-mrs buocueiugs - fcr-ign 13.5 - 17.6 25.6 220.6- do-ectic 112.3 275.8 188.2 256.1 275.9

A.co.nte peouble and acurned .ep. 121.2 236.5 186.0 222.2 411.9Current narutten of tern dubte 134.7 184.0 616.6 681.5 689.0

Total Cufrurt LiabilitiCe 461.9 849.1 1,104.3 1,863.6 2,097.3

Lune-Tern SorroelenR:foreign currency borrovinga 1.097,7 1,005.9 1,450.7 1,979.6 3,027.3Dottrc currency horre.ings 899.2 1,112.9 1,583.3 2,207.9 3,614.7

Total 1.982.9 2,118.9 3,042.0 4.187.5 6,642.0

Leen: curr-at --toritie (134.2) (184.0) (616.6) (681.5) (689.0)Add: dep..in -obj. to rcllcvecft 365.8 466.0 1,878.4 3,019.0 2,926.5

Total lone-tree b-rroeitn- 2,214.5 2,400.8 4,303.8 6,525.0 8,879.5

Defnrred credit. 43.0 54.2 354.0 426.7 444.8

lqoity:

Paid-ic share capital 1,703,1 1,735.6 1,746.9 1,986.2 2,449.9

Ectained -rncnign 144.5 219.7 276.8 163.5 261.8Re::rv: for l ontrnnlcn 11.7 20.0 32.1 102.3 128.8Renerve for for_ige nuchange rInk - - - 20.4 29.2

Total 1.859.23

1,975.3 2075.8 2.272.4 2.869.7

Tortl Liabilitiee aed Etoity 4.578.6 5,279.4 7,837.9 11,087.7 14,291.3

G-aranten- Ontnrandlnu:

FrnTiN: nedine- 4 luog-rern 334.7 391.8 486.4 503.0 577.9

(0 nillion) ehbrt-ter- 29.0 41.1 9.0 9.2 13.9DOoe-tic: andin- & lng-ters 5.3 4.3 10.3 29.2 34.9

(P nilliuc) ehbrt-ter- 35.6 28.1 21.2 7.6 6.0

Total Peoulvaleet /c 2.566.3 2,999.6 3,514.6 3,843.6 4,418.3

Truet fundn adnini-ncred on behalf

of the Goveranet 124.3 77.8 85.8 105.2 109.7

RatiosTotal debt (incl. guaranteen)

to equIty 2.9:1 3,2:1 4.3:1 5,6:1 5.5:1Current r,tio (a) /d 1.6:1 1,2:1 1.4:1 1.0:1 1.2:1

(b) . 0.99:1 0.8:1 0.5:1 0.4:1 0.7:1

Ia Endear3ed prIncIpal ntsU-t -collectible htt_in cue year.

/b Enoludee depcstn vith sariry of over cue year: P 440 eilliun in FY76 and P 900sililoc iS FY77.Ec Etehge care: N 6.5 0t U0S1 fOr FY72; P 6.76 for FY73; P 6.7 fur FY75; P 7.43for FY76 and P 7.4 fec YY77.

/d Curre_t rantin bae.d on room ...eaet. sod liabilities an eho-n above.

Ie Current ration bused on ncureet liabilitito, inclodiNg de.opits nohicb t to rollover,but enclodie tho.e vith -r rban cnn year-' eat-nity.

AEP Protjcts Dnpurtup. tM:rch 1, 1978

ANNEx 4

T-16

PHILIPPINES

DEVELOPMENT BANK OF THE PHILIPPINES

Summarized Income Statements, for the Years Ended June 30, 1973 - 1977(P'OOO)

1973 1974 1975 1976 1977/a

IncomeInterest on

-agricultural loans 39,101 61,078 53,126 62,302 104,189-industrial loans 154,309 191,097 184,253 261,318 352,908-real estate loans 20,480 22,038 24,579 69,428 146,077-PDB redisc. & CMR 4,895 6,323 5,643 8,230 17,021

Subtotal 218,785 280,536 267,601 401,278 620,195

Interest on securities 14,220 36,807 63,792 92,672 91,177Dividend income 7,745 3,228 4,657 18,570 15,105Capital gains on sales of

securities 19,428 40,012 1,854 - -Guarantee fees 40,519 54,113 55,578 83,484 82,936Administration fees on trust funds 1,026 547 228 176 173Others 27,594 28,567 187,213/b 217,539/b 189,587/b

Total 329,317 443,810 580,923 813,719 999,173

ExpensesFinancial expense 228,529 254,219 339,388 540,781 727,547Salaries & other personnel exp. 37,285 38,224 51,261 63,682 75,392Other administrative expenses 20,533 25,340 7

8,149/c 80,

3 24/c 101,413/c

Total 286,347 317,783 468,798 684,787 904,352

Income before income tax & provision 42,970 126,027 112,125 128,932 94,821Less: Income tax 3,724 26,791 25,708 24,198 6,557

Reserve for contingencies 1,200 8,400 15,000 20,000 6,000

NET INCOME 38,046 90,836 71,417 84,734 82,264

ApDropriat ionsTransferred to:

Paid-in capital 7,609 18,167 14,283 16,947 8,836Res. for foreign exchange risk - - - 16,943 8,836Res. for contingencies - - - 50,840 26,508Surplus - Bank Proper 30,437 72,669 57,134 - 38,084

Total 38,046 90,836 71,417 84,734 82,264

RatiosI. As % of average total assets

1. Gross income 7.8 9.0 8.9 8.6 7.92. Financial expenses 5.4 5.2 5.2 5.7 5.73. Gross spread (1-2) 2.4 3.8 3.7 2.9 2.24. Administrative expenses 1.4 1.3 2.0 1.5 1.45. Income before tax & prov. 1.0 2.5 1.7 1.4 0.8

II. Net income as % of:1. Average equity 3.2 4.8 3.5 3.9 3.22. Share capital 2.2 5.2 4.1 4.3 3.4

III. Other ratios:1. Interest income on loans as

% of avg. loan portfolio 7.2 8.9 7.5 7.4 7.82. Cost of debt as Z of avg debt 8.6 9.1 8.2 8.1 7.83. Average interest spread (1-2) -1.4 -0.2 -0.7 -0.7 -

/a Accounts for FY77 are audited only up to December 31, 1976. DBP shifted its accountingyear (effective January 1977) from fiscal year to calendar year basis and, therefore,prepared its six-monthly interim accounts for July-December 1976, which were audited.For realistic comparison, the income statement summarized here covers a one-year periodfrom July 1976 to June 1977.

/b Including the following: FY75 FY76 FY77

Rental income from acquired assets 134,002 105,112 103,159Interest income on deposits 21,109 26,543 3,487Additional interest and penalties - 10,461 41,183

/c Including the following:

IDepreciation on acquired assets: 42,220 31,678 31,678

AEP Projects DepartmentMarch 1, 1978

ANN8W 4

PUILIPPINIES

DEVELOPMENT BANK OP THE PHILIPPINES

Alysis of LOan Portfolio 1a as of June 30. 1977(P illion)

Number of accounts Principal ouatan.dine Industrial loan All loaeIndustrial All Onduatu1 All No. of N. f

lo-n S lotus r lusna I 1oaos 2 aorta. Amount taunts. Ao, I

A. Status of Loan Peo-folioLoans servicing ragniarip 4,292 22.8 60,802 22.3 2.930 65.L 4,978 55.7In arrears fos less than I year 8,919 47.3 74,331 27.3 1,142 25.4 2,428 27.2 8,919 90 30.8 74.331 207 22.1

Subtotal 13.211 70.1 135.133 49.6 4.072 90.5 7.406 82.9 8.919 90 30.8 74.331 207 22.1

te arrears for:1-2 ytears 3,021 16.0 104,316 38.3 224 5.0 1,065 11.9 3,021 64 21.9 104,316 363 38.83-4 yeacu 194 1.2 11,903 4.3 47 1.0 128 1.4 194 34 11.8 11,903 96 10.25 yearn &,vr76 0.4 5,005 1.8 118 2.6 202 2.3 76 58 20.1 5.005 121 13.0Fet-cd 2.368 12.5 16,300 6.0 41 0.9 133 1.5 2,368 45 15.4 16.308 148 15.9

Subtotal 5.659 20.9 137.232 50.4 430 9.5 1.528 17.1 5.659 201 69.2 137,532 728 77.9

T.otal 18.870 100.0 272.665 100. 4.502 100.0 8.934 180.0 14.578 291 100.0 211L863 935 100.0

0. eeroohioi ODietcibotiouManis & suborba 2,191 11.6 5,042 1.9 1,301 28.9 2,757 30.9 1,813 118 40.4 3,756 189 20.2Ilococ & Mt. Proiuce 1.034 5.5 7,483 2.7 74 1.7 294 3.3 620 3 1.1 1,949 20 2.1Cteayan Velley & Bananas 987 5.2 21,035 7.7 10 0.4 258 2.9 818 2 0.9 15,080 56 6.2Centrl Luson 2,370 12.6 53,777 19.7 768 17.0 1,336 15.0 1,786 49 16.7 47,836 186 19.9Southern Lueoo 3,580 L9.0 27,159 10.0 535 11.9 959 10.7 2,910 30 10.3 20,439 89 9.5Bicol & Manhaco 945 5.0 18,749 6.9 93 2.1 228 2.5 662 7 2.4 15,158 37 3.9.esteoo Visapas 1,304 6.9 26,692 9.8 159 3.5 501 5.6 901 18 6.3 19,575 76 8.2Easteco Visnyas I,951 9.8 30,922 11.3 409 9.1 649 7.3 1,333 27 9.2 24,935 60 7.3Northern Oiudareo 1,305 6.9 26,657 9.8 1,036 23.0 1,261 14.1 961 28 9.6 19,745 70 7.5Southern Oiud-neo 3,303 17.5 55,149 20.2 109 2.4 691 7.7 2,734 9 3.1 43,390 144 15.4

Total I 7 100.0 272,665 100.0 4

,502 100.0 8.934 100.0 14,578 291 100.0 21 1

_863 935 100.0

Principal Princiral 6 Iotereet orrar Pfrtip outet(o) 2 (D)oi

N.:uber A .u..t 2 accts. X Ano... t Amount X of (A) of (B) of (B)(A) (B) (C) (D) (E)

C. An-lysis by Si.eUp to P 2,000 37,491 13.8 44 0.5 31,42u 14.0 25 2.71P 2,001 to 0 58000 130.491 47.9 459 5.1 113.915 53.8 164 I7.611 149 Z9.0 78.6 70.0 25.2P 5,001 to P 10,000 50,164 18.4 342 3.8 33,543 16.8 88 9.41

8 10, 001 no P 50.080 45,454 16.7 796 8.9 26,406 12.5 137 14.61P 50.001 to P 100,000 4 3890 1. 7 1l 2.4 1,932 0.9 41 4.4 103 2.6 49.7 48.9 19.6

o 100,001 to P 500,000 3,720 1.4 403 6.0 1a980 1.0 124 13.2 342 8.7 53.2 56.7 20.5P 500,001 to - 1 million 509 0.2 756 3.3 203 0.1 46 4.9 147 4.2 55.6 56.2 15.4

-oc P 1 Y to P 30 440 0.2 630 7.1 245 0.1 85 9.1 360 9.1 55.2 57.0 13.580er 9 3 ' to P 5 M 97 - 302 3.4 39 - 34 3.71Ovo- 9 5 M no P 10 1K 95 601 6.7 43 - 53 5.7131,835 46.4 42.0 33.0 4.0Over P 10 M 134 - 4,650 52.0 55 - 137 14.71

Total 272.665 100.0 8.934 102.0 211.863 100.0 935 100.0 3.956 102.0 77.7 44.3 10.5

D. Sectoral Distribution

Ioduetrial I.anFond manufactuting 1,045 0.4 460 5.2 688 0.3 49 5.3 273 4.9 65.4 59.4 10.7Rice& 6 -oc ldn,try 30 - 1 - 29 - 1 0.1I 1 - 96.7 99.9 87.5brver-ge iodustcy 11 - 2 - 3 - 0 - 1 - 45.5 28.4 17.4Coconut products 6 it

preparotion 36 - 26 0.3 21 - 2 0.2 6 0.1 58.3 21.5 5.7Tohacco ,,taufactoro 2 - 50 0.6 2 - 6 0.6 50 1.3 100.0 100.0 11.6Teotile, cordaga & tei,a 197 0.1 544 6.1 137 0.1 34 3.6 230 5.8 69.5 42.3 6.3W-rino nppuo1/made-up

tootilos 387 0.1 49 0.5 279 0.1 6 0.6 37 0.9 72.1 75.9 11.4Wood. 0000 6 cork 140 0.1 80 0.9 96 0.1 12 1.3 24 0.6 60.6 30.4 15.4Furoiture 4 flotucru 278 0.1 28 0.3 188 0.1 5 0.5 18 0.5 67.0 63.6 16 5Par 6 paper indostcioa 27 - 147 1.7 18 - 16 1.7 142 3.6 64.0 96.2 10.9Printing, publishing 4 allied

induntrios 173 0.1 26 0.3 L12 0.1 3 0.3 13 0.3 64.7 49.1 12.9I-anhar 6 ieuchsr produce 174 0.1 43 0.5 133 0.1 9 1.0 40 1.0 76.4 92.9 20.8

nbbher products 51 - 13 0.1 38 - 3 0.5 10 0.2 74.5 74.1 34.3ChemOrol 6 chemical pc-4ots. 90 - 78 0.9 72 - 13 1.4 51 1.3 73.9 65.0 16.6Nonse=tilc products 454 0.2 1,099 12.3 256 0.1 13 1.4 1l1 2.8 56.4 10.1 1.2

aetul indoatries 4 pcodootn 272 0.1 306 3.4 200 0.1 12 1.3 66 1.7 73.5 21.7 3.9Ouchi-ecy (eu-ludindg tee-

tnicnl achinery) 217 0.1 30 0.3 144 0.1 4 0.4 23 0.6 66.4 74.3 13.5ilectrica- mchinery 6

apparatus 76 - 42 0.5 51 - 1 0.1 19 0.5 67.1 45.7 2.4

Treespoctnt-io oqnip-ent 6repaic 348 0.1 52 0.6 225 0.1 9 1.0 29 0.7 64.7 55.5 17.7-iscellane.oos tn. fsco-riugindstries 279 0.1 75 0.8 188 0.1 5 0.5 34 0.9 67.4 45.2 6.7

Futrcrtive ind isttie i 117 - 011 6.8 93 - 8 0.9 44 1.1 79.5 7.2 1.4PUbli unilitiae 6 soryice 2,695 1.0 605 6.8 1,960 0.9 62 6.7 252 6.4 72.7 41.6 10.3Cotn;ge nodustotee 71725 0.6 13 01 14,415 0.7 2 03 L 9 0 2 82.0 70 .4 20.0Small loan. .757 3.2 83 09 7,155 3.4 11 1. 5 1.4 81.7 67. 14.1Nunhsnhiug lilnsttoniun 8 - 32 0.4 5 1 0.1 28 0.7 62.5 89.6 2.8Wholesale nc-de 44 - 3 - 31 - 1 0.1 3 0.1 70.5 82.4 20.0Retail trade 1.229 0.5 5 0.1 1.037 0.5 1 0.1 4 0.1 84.4 86.3 14.0

Subtotal 18.870 6.9 4.502 50.4 14.578 6.9 291 31.2 1.573 39.7 77.3 34.9 6.5

Agicultnral loa-s 217,393 79.7 2,129 23.8 172,040 01.2 527 56.4 1,316 33.3 79.1 61.8 24.8Raal eutBtr louts 30,127 11.1 1,815 20.3 21.837 10 3 87 93 961 24.3 72.5 53.0 4 .Governsrt & luodad osltst loan 277 0.0 157 1.8 30 - I3 1.4 26 0. 10. 1'6.5 6.2Concract mortSg.ae tcetivale 3,946 1.5 242 2.7 2,792 1.3 12 1.3 57 1.4 70.8 23.5 4.9Advocce, & rediscounts - I58 1,712 0.6 88 1.0 586 0.3 4 0.4 24 0.6 34.2 27.0 4.9Educational aeistance boate 340 0.1 1 - - - -

Total 272.665 100.0 8.934 100.0 211.863 100.0 935 100.0 3.956 100.0 77.7 44.3 10.5

/- including lo- lliticion, trust foads and collainral pceforred tocke. E.cludas advances on goorottoos.

/b Abont 60l of this amonet reprenoane princip.1, 401 int.rest.

AEP Projects DSparteontMarch 1, 1978

ANINEX 4T-18

PHILIPPINES

DEVELOPMENT BANK OF THE PHILIPPINES

Analysis of Home Industry and SMI Loan Portfolio as of June 30, 1977(P' 00)

Outstanding loans Amount actually in arrearsNunber % Amount 2 Principal Interest Total As percentage As percentage of

of total arrears loans outstanding

A. Home Industry Loans(Loans of op to P 50,000)

Loans servicing regularly 1,299 23.3 18,129 30.2Loans in arrears for:

0 - 3 months 996 598 1,594 11.8 2.73 - 6 months 739 511 1,250 9.3 2.16 - 12 months 1,790 913 2,703 20.0 4.5

12 - 24 months 1,610 816 2,426 18.0 4.0Over 2 years 2,815 539 3,354 24.8 5.6Penalty and charges /a - 2,170 2,170 16.1 3.6

Subtotal 4,279 76.7 41,806 69.8 7,950 5,547 13,497 100.0 22.5

Total 5.578 100.0 59,935 100.0 7,950 5,547 13,497 100.0 22.5

B. Small Industry Loans(Loans of P 50,001 - P 800,000)

Loans servicing regularly 504 35.2 57,248 27.5Loans in arrears for:

0 - 3 months 2,977 2,825 5,802 10.2 2.83 - 6 months 2,737 2,086 4,823 8.5 2.36 - 12 months 4,927 3,002 7,929 14.0 3.8

12 - 24 months 7,077 3,878 10,955 19.3 5.3Over 2 years 15,242 4,767 20,009 35.2 9.6Penalty and charges /a - 7,252 7,252 12.8 3.5

Subtotal 927 64.8 151,029 72.5 32.960 23,810 56,770 100.0 27.3

Total 1,431 100.0 208,277 100.0 32.960 23,810 56,770 100.0 27.3

C. Medium Industry Loans(Loans over F 800,000)

Loans servicing regularly 40 27.4 44,977 26.2Loans in arrears for:

O - 3 months 2,009 3,134 5,143 14.9 3.03 - 6 months 1,471 2,109 3,580 10.4 2.16 - 12 months 1,762 1,705 3,467 10.1 2.0

12 - 24 months 2,555 2,744 5,299 15.4 3.1Over 2 years 6,653 4,121 10,774 31.3 6.2Penalty and charges La - 6,150 6,150 17.9 3.6

Subtotal 106 72.6 126,855 73.8 14.450 19,963 34,413 100.0 20.0

Total 146 100.0 171,832 100.0 14,450 19,963 34,413 100.0 20.0

D. Total SMI Loans (B + C)Loans servicing regularly 544 34.5 102,225 26.9Loans in arrears for:

0 - 3 months 4,986 5,959 10,945 12.0 2.93 - 6 months 4,208 4,195 8,403 9.2 2.26 - 12 months 6,689 4,707 11,396 12.5 3.0

12 - 24 months 9,632 6,622 16,254 17.8 4.3Over 2 years 21,895 8,888 30,783 33.8 8.1Penalty and charges /a - 13,402 13,402 14.7 3.5

Subtotal 1,033 65.5 277,884 73.1 47,410 43,773 91,183 100.0 24.0

Total 1,577 100.0 380,109 100.0 47,410 43,773 91,183 100.0 24.0

/a E-1lodes 8 branches, namoly, bacolod, Bagu.i, Cabanatuan, Catarwan, Dumoguete, Puerto Princess, Tacloban aed Tagbilaran branches.

AEP Projects DepartmentMarch 1, 1978

ANNEX 4

T-19

PRILIPPINES

DEVELOPMENT BANK OF THE PHILIPPINES

Projected Appraisals, Commitments and Disbursements, 1977-82

(P million)

Actual Projected

1977 (6 mos.) 1977 (6 mos.) 1977 1978 1979 1980 1981 1982

(Jan-dun) (Jul-Dec) (12 mos.)

ApprovalsLoans

Industrial loans 808.3 862.0 1,670.3 1,402.4 1,488.6 1,611.2 1,785.0 1,980.7

(of which foreign currency loans) (545.3) (402.2) (947.5) (706.9) (795.5) (849.6) (934.6) (1,028.0)

Agricultural loans 271.5 337.1 608.6 711.3 752.1 885.8 1,043.0 1,230.2

Real estate and government loans 128.3 329.0 457.3 257.2 254.0 255.1 274.3 298.0

Private development banks 22.4 22.2 44.6 65.6 105.0 167.9 170.0 170.0

Subtotal 1,230.5 1,550.3 2,780.8 2.436.5 2,599.7 2,920.0 3,272.3 3,678.9

Investments 12.3 22.7 35.0 33.3 29.8 29.8 - -

Total loans and investments 1,242.8 1,573.0 2,815.8 2,469.8 2,629.5 2,949.8 3,272.3 3,678.9

Guarantees (US$ million) 57.6 50.0 107.6 100.0 100.0 100.0 100.0 100.0

Total approvals 1,669.0 2,248.7 3,917.7 3,209.8 3,369.5 3,689.8 4,012.1 4,418.9

CommitmentsLoans

Industrial loans 796.3 849.2 1,645.5 1,438.1 1,278.4 1,626.3 1,680.0 1,931.7

(of which foreign currency loans) (400.0) (425.8) (825.8) (709.1) (605.4) (866.5) (870.6) (1,004.6)

Agricultural loans 230.0 343.3 573.3 686.9 690.0 863.5 947.7 1,183.4

Real estate and government loans 110.0 140.4 250.4 400.1 238.8 244.5 287.7 292.2

Private development banks 10.0 24.3 34.3 63.7 104.2 166.8 169.9 170.0

Subtotal 1,146.3 1,357.2 2,503.5 2,588.8 2,311.4 2,901.1 3,085.3 3,577.3

Investments 12.3 22.7 35.0 33.3 29.8 29.8 8.4 -

Total loans and investments 1,158.6 1,379.9 2,538.5 2,622.1 2,341.2 2,930.9 3,093.7 3.577.3

Guarantees (US$ million) 60.2 33.5 93.7 84.2 94.3 97.9 99.2 99.7

Total commitments 1,604.1 1,627.8 3,231.9 3,245.2 3,039.0 3,655.4 3,827.8 4,315.1

DisbursementsLoans

Industrial loans 717.5 702.3 1,419.8 1,397.9 1,349.9 1,480.3 1,678.1 1,831.1

(of which foreign currency loans) (296.2) (274.1) (570.3) (695.0) (503.8) (850.7) (947.2) (950.9)

Agricultural loans 258.2 371.3 629.5 703.0 732.8 734.2 848.8 989.0

Real estate and government loans 240.6 188.0 428.6 357.5 252.0 222.5 299.0 309.9

Private development banks 20.9 20.2 41.1 63.3 103.1 160.8 173.1 170.0

Subtotal 1,237.2 1,281.8 2,519.0 2,521.7 2,437.8 2,597.8 2,999.0 3,300.0

Investments 12.3 22.7 35.0 33.3 29.8 29.8 8.4 -

Total loans and investments 1,249.5 1,304.5 2,554.0 2,555.0 2,467.6 2,627.6 3,007.4 3,300.0

Guarantees (US$ million) 60.2 33.5 93.7 84.2 94.3 97.9 99.2 99.7

Total disbursements 1,695.0 1,552.4 3,2474. 3,178.1 3,165.4 3,352.1 3,741.5 4,037.8

Assumptions1. Approvals - The projected approvals for July-December 1977 are based on the actual pipeline of projects as of June 30, 1977. The lower

projected approvals level in CY1978 than in CY1977 reflects constrains on DBP's domestic resources, slack in business conditions and

effects of DBP's massive collection drive. Approvals for CY79 through 82 are based on the expected growth potentials of each sector.

2. Commitments - 75% of loan approvals are assumed to be committed in the same year and the remaining 25% in the following year. These ratios

reflect DBP's actual past experience.

3. Disbursements - are based on the closing dates of the respective credit loans, the nature and requirement of projects, and past pattern of

DBP's disbursements.

AEP Projects DepartmentMarch 1, 1978

Dl,.yOPENT EANt OFt T1il PulLPIINlES

Year t d Pro1ected Silt Lout AetrO9ee. CY76-82 /c(P000)

CY76 Ac 77 J.O-ADB 1977 Se.-D.c 1977 CY77 C PE COr d CO0 cc8i

Number Aaouet Numer AsntA Su.0er M- ount Number A- ount Num.ber AouN Nmb-er Am Nunt Numbe- Amoutt Su er NA unt Muter AmouNt Btoor Aintt

p 50.001 - B 100.000Read office 61 5.115 55 4,591 32 2,637 16 1,320 4 3,957 5Z 4,482 56 5.007 52 4.802 57 5,390 62 5.880

2,eBehm. 31 2,316 72 5,758 85 5,590 43 2,828 12N 8,418 111 4,324 119 9,720 135 ILN398 146 12.430 II 13,722

Totti 92 7,431 127 10.449 117 8. 227 59 4.148 176 12.375 163 12,806 175 14.727 187 16.200 203 17.820 223 19,602

B 100.BOB - P 5000.006Head Bffle. 60 16I165 71 14,263 06 12,198 28 7.°00 04 99,198 101 35,653 123 43,372 101 86,036 146 51,775 152 33,894

.r.Ch. 69 14.450 123 22.729 115 20.041 56 10,111 171 30.152 142 25,177 144 26.583 151 30,904 i53 32,870 258 44.095

Totol 129 30.622 194 308922 171 32.239 84 11.111 255 49.350 243 60.830 267 69.955 282 76.950 299 84645 310 97.989

F 500.0131 - P 800.000Bead offIce 7 4.590 5 3.124 2 1.269 1 606 3 1.905 12 8,506 14 9,945 17 13,039 20 15 600 20 15,704

B-eaeh_ 0 5 410 5 2 977 B 5.324 4 2,664 12 7,988 16 10,654 18 12.146 12 7t481 12 8 60 13 a,620

,,,.I 15 10.005 10 6.101 10 6.593 s 3 300 It 9 893 28 19.210 92 22.091 i9 20.880 32 23.760 33 24 524

p800.001 - P 2.500.000Ha d offfila 31 35,446 30 52,494 24 41,583 9 19,332 33 61,168 27 52,479 ZM 57.,84 30 .37,1 33 47,288 33 D,u03e

ertt.h.e 19 44,402 11 13,356 7 0,493 3 4,248 10 12,741 11 14.755 12 19,665 15 24,772 17 28,958 16 30,873

50 79.848 41 65.850 31 50.329 12 23,580 43 73.909 38 67.234 40 77.319 65 88.471 49 96,526 49 102.981

All L B SO.WI - P 2.5.H ad officO 159 61,316 161 76,572 114 57.940 54 28,288 168 86,Z28 192 101,170 221 115.978 230 127,576 255 140,333 267 154,366

BreNKIcee 127 66,590 211 44,820 215 39.448 106 19,851 722 59,099 280 58,910 290 66,.14 313 706925 328 82,418 368 90,660

286 127.906 372 121.392 329 97.388 180 48.139 489 145.527 472 160,080

514 184,092 543 202.501 583 222 751 615 245.026

j B Egiutag Ji .e 1977, W0P,- fif-mI your hbea1

d fr- July.Juum to J-utsu-0.c_hbr.

uAP ft6jmtt D".preutKuoemu 17'9977

ANNEX 4

T-21

PHILIPPINES

DEVELOPMENT BANK OF THE PHILIPPINES

Long-Term Resource Position as of June 30. 1977(P million)

Item Amount

Domestic SourcesEquity

Paid-in capital 2,449.9Reserves and surplus 419.8

Subtotal 2,869.7

Borrowings (net of repayment)Bonds and notesOrdinary bonds, 5-8% p.a., due 1975-85 126.8Progress bonds, 9% p.a., due 1976-77 296.9Bills payable - repurchase agreements 946.2LaNotes payable to the Government and Government agencies 926.2Countryside bills, 9% p.a., due 1980-85 867.8

Subtotal 3,163.9

Special Loans and FundsAdvances from Central Bank 88.4Central Bank funds for hotel and agricultural projects 133.6Special loans payable and funds /b 33.5Government funds for agricultural and SMI projects /c 909.1

Subtotal 1,164.6

Time and saving deposits /d subject to rollover 2,926.5Less: Central Bank's reserve requirement /e 255.7

Subtotal 2,670.8

Total 9,869.0

Foreign SourcesBorrowingsForeign government agencies 732.8Commercial banks and others 1,715.8Foreign currency deposits (net of reserve requirement) 244.9IBRD and ADB loans /f 1,025.5

Total 3,699.0

Total resources 13,568.0

Less: Loans and advances outstanding 9,031.1Equity and long-term security investments 899.4Fixed and other long-term assets 830.6Acquired assets (net) 1,048.9Loans under ligitation 183.9

Subtotal 11,993.9

Resources available for disbursements 1,574.1Less: Undisbursed commitments 999.6

Resources available for commitments 574.5/g

/a Includes P 875.2 million for hotel projects./b This includes an undrawn balance of P 13.9 million under Central Bank's alloca-

tion of funds for commercial banks' capitalization./c Includes IBRD and ADB loans relent to DBP in domestic currency./d Includes deposits of P 900 million with maturity of 3-5 years./e Consists of 8% reserve requirement and 6.5% reserve against deposit substitutes./f Loans for industrial and shipping projects./R Of which P 505.0 million or $68.2 million were available foreign currency

commitments.

AEP Projects DepartmentMarch 1, 1978

ANNEX 4T-22

PHILIPPINES

DEVELOPMENT BANK OF THE PHILIPPINES

Projected Income Statements, 1977-82(P million)

Actual Projected1976 1977 1978 1979 1980 1981 1982

IncomeInterest on loans 525.1 764.6 1,168.5 1,343.3 1,561.6 1,862.8 2,288.4Earnings on funds and securities 122.9 120.3 178.3 245.3 287.7 336.3 383.2Miscellaneous bank fees 92.5 99.0 113.9 148.1 182.2 235.3 277.3Other income 164.2 189.5 198.8 278.3/a 229.1 246.0 262.7

Total income 904.7 1,173.4 1,659.5 2,015.0 2,260.6 2,680.4 3,211.6

ExpensesInterest and other financial expenses 639.8 842.6 1,014.8 1,188.8 1,351.2 1,530.9 1,661.3Salaries and other personnel expenses 68.8 83.2 93.5 104.8 117.7 132.3 148.7Other administrative expense 82.7 84.8 96.9 105.4 114.2 123.4 133.4

Total expenses 791.3 1,010.6 1,205.2 1,399.0 1,583.1 1,759.6 1,943.4

Net operating income 113.4 162.8 454.3 616.0 677.5 920.8 1,268.2Less: Provision for income tax 18.1 24.5 90.8 110.3 135.5 184.2 253.6

Provision for doubtful accounts 6.0 20.0 27.4 25.9 26.7 32.3 35.1

Net income 89.3 118.3 336.1 479.8 515.3 704.3 979.5

AppropriationsTransferred to paid-in capital 17.3 23.7 67.2 96.0 103.1 140.8 195.9Surplus - - 15.8 287.8 308.8 416.1 575.5Reserve for foreign exchange risk 54.7 23.7 67.2 96.0 103.0 140.9 195.9Reserve for contingencies 17.3 70.9 185.9 - 0.4 6.5 12.2

Total appropriations 89.3 118.3 336.1 479.8 515.3 704.3 979.5

RatiosI. As % of average total assets:

Gross income 8.2 8.3 9.7 10.2 10.1 10.7 11.6Financial expenses 5.8 5.9 5.9 6.0 6.1 6.0 6.0Administrative expenses 1.4 1.2 1.1 1.1 1.0 1.0 1.0

Total expenses 7.2 7.1 7.0 7.1 7.1 7.0 7.0

Income before tax and provisions 1.0 1.2 2.7 3.1 3.0 3.7 4.6

II. Net income as % of:Average equity 3.7 4.1 9.6 11.4 10.3 11.9 13.9Share capital 3.9 4.3 10.7 13.5 13.1 16.1 20.1

/a Includes capital gain of P 64.6 million on the sale of investments.

AEP Projects DepartmentMarch 1, 1978

ANNEX 4T-23

PHILIPPINES

DE'ELOPYENT RANX OF THE PHILIPPINES

Poiected Bala.ce Shets., December 31, 1977-82(8 ellics)

Actual Pci.e,ted1977 1977 1978 1979 1980 1981 1982

(J..e 30)

AussetCu-rret assets

Cash and dun f.ce bhnk. 190.0 208.8 193.3 192.8 193.5 194.3 195.14arketable securities 1,508.2 1,828.2 2,866.8 3,164.3 3,529.4 3.901.9 4,281.8Sbhrt-tere advances 36.8 53.5 72.4 73.0 80.0 85.0 90.0Interest r-ceivable 66.7 63.4 67.0 71.0 75.0 79.0 83.0Sihkin0 F0ud eeceivable 144.1 137.6 75.0 75.0 75.0 75.0 75.0Accounts rcnlvahbl 77.9 75.0 90.0 105.0 108.8 95.0 90.0Curreet psrtton c8 long-tern leans 493.2 741.9 860.3 1,014.8 1,201.3 1,335.9 1,552.8

otal curr-nt assets 2,516.9 3.108.5 4.2Z9.0 4,695.9 5.254.2 5,766.1 6.367.7

Lusg-t-ee luana /aAgricultural lean- 2,123.2 2,386.0 2,828.8 3,256.8 3,632.4 4,044.9 4,515.2Indentrial leuns 5,873.7 6,663.1 8,083.2 9,326.2 10,675.7 12,218.8 13,773.9Real esatetn IeaS 435.1 489.2 538.5 594.5 644.5 726.5 842.1CGvnrnscst & Ianded estate lease 154.3 175.9 233.0 299.1 348.0 434.8 495.6Advanec Ingaraente loans 357.8 537.7 470.7 535.8 548.6 420.4 364.0Educational castsasne Iass 1.4 2.9 5.9 8.9 11.9 14.9 17.9Coetraet -lrtgngn receivable 194.6 195.8 197.8 198.5 193.3 208.8 225.3PFD adB enena 6 redseceuts 88.3 91.8 118.8 179.0 278.5 377.1 457.8

Tete1 lenn-tnr leans 9,238.4 10,342.4 12,476.7 14,398.8 16,332.9 18,446.2 20,692.0

Lens: ERtaruc for pe.sible IQs... (23.41 1103.4) (124.8) (144.0) (163.3) (184.5) (206.9)Current p-rtion (493.2) (741.9) (864.5) (1,014.8) (1,201.3) (1,335.9) (1,552.8)

Nct teens 8,721.8 9,497.1 11,487.4 13,240.0 14,968.3 16,925.8 18.932,3

InvesteentsEqcity - Preferred 318.2 375.2 459.1 657.7 854.6 1,052.8 1,239.6

- C.eoe /b 475.9 487.4 239.9 239.8 239.8 239.8 239.8bonds 105.4 165.8 176.9 182.9 182.9 182.9 182.9

otal lt c-tern ite-et-enet 899.5 1,028.4 875.8 1.080.4 1,277.3 1,475.5 1.682.3

Total lees-tern portfleio 9,621.3 10,525.5 12,363.2 14.320.4 16,245.6 18,401.3 20.614.6

Pined ... ets (set) 77.0 78.0 117.5 179.2 213.4 245.2 274.6Pr-per_tes acquired thr-ugh furecleser lb 1,048.9 1,044.3 1,042.2 1,040,0 1,039,8 1,037.9 1,037.7Othen .et-.. 1,027.2 1,057.5 799.4 815.5 831.9 848.4 865.4

Octal unsent 14,291.3 15,815.8 18,551.3 21.051.0 23,384.9 26,298.9 29.160.0

Liabilities aed Ret WorthCurrent libilatice

SRvinge and time dPepsits (suctrtig uithin I year) 500.0 755.7 510,4 522.5 534.4 546.5 558.5Shurc-teen borrowings- g Foreign 220.6 220.6 220.6 220.6 220.6 220.6 220.6

- DoeatIc 275.8 145.8 145.8 145.8 145.8 145.8 145.8Accun payable I accrued expennse 411.9 425.2 407,6 382.8 435.3 439.6 440.0Cerreet _eturt els ef ledg-term debts 689.0 851.6 759.9 572.5 873.4 1,199.1 1,344.9

o tal current liabilities 2,097.3 2,398.9 2.044.3 1,844.2 2,209.5 2.551.6 2.709.8

L-eg-tars debtturclgu currency berreclsge 3,027.3 3,684.7 3,836.4 4,396.8 4,919.8 5,798.7 6,647.6ousuctuccurrenccy berrt-ineg 3,614.7 4,420.9 6,513.1 7,786.3 8,916.2 9,740.3 10,472.2

Subtotal 6,642.0 8,105.6 10,449.5 12.183.1 13.836.0 15,539.0 17,119,0

Lens: Current eacuretien 689.0 851.6 759.9 572.5 873.4 1,199.1 1,344.9Add: Deposits etcrei t eyond I ynar 2,926.5 2,523.8 2,523.8 2,503.6 2.503.5 2,503.5 2,503.6

Totet len-e-tcr debts 8,879.5 9,777.8 12,213.4 14,114.2 15,466.1 16,843.4 18.278,5

DOferrcd credits 444.8 456.3 474.6 493.8 495.1 485.3 473.7

EquityPaid-up capital 2,449.9 2,778.5 3,145.7 3,541.7 3,944.9 4,385.7 4,881.6Retaired earnies- 44.1 - - - - 1,196.1 1,771.6Sueplus 217.7 151.7 167.5 471.2 779.9 376.8 389,0Reserve for contcen-cis 128.8 199.8 385.7 369.9 370.3 -tenerve fur f-riegn -ehcnage risks 29.2 52.8 120.1 216.0 319.1 460.0 655.8

otal esutt 2,869.7 3B48 3.819.0 4,598.8 5.414,2 6,418.6 7.698.0

otal liabilities end net north 14,291.3 15,815.8 18,551.3 21.051.0 23,584.9 26,298.9 29.160.0

Ceetienret LiubilitiesF-reign guarantee cututaudig 4,377.4 4,066.3 3,856,9 3,699,1 3,703.2 3,768.0 3,889.8Runsute geurengenca estecandieg 40.9 40.9 40.9 40.9 40.9 40.9 40.9

Totel 4, 418.3 4,107.2 3.897,0 3,740.0 3,774.1 3,808.9 3,930.7

RatioDsTotal debt (includding g--rte..s) to equity 5.5:1 5.3:1 4.9:1 4.4:1 4.1:1 3,7:1 3.3:1Currenctratie (a) / 1.2:1 1.3:1 2.1:1 2,5:1 2.4:1 2.3:1 2.4:1

(b) Ld 0.7:I 0.7:1 1.0:1 1.2:I 1.ItI 1.It1 1.2:1

/a Iccledisg leans und-r litigation.

/b Net o0 provisio.n fur doubtful a-c-uets,

s Current rutic based -current asnets cud liabilities as aheen above.

/d Curreet rlti based cc current liabilities inleudieg depocits subject to rollover but sexlding these vith a uses than .... y5rcatuity .

AEP P'ctDe p-te -tMarch 1, 1978

ANNEX 4T-24

PHILIPPINES

DEVELOPMENT BANK OF THE PHILIPPINES

Projected Cash Flow Statements, 1977-82(P million)

1977 1978 1979 1980 1981 1982

SourcesNet income after tax 118.3 336.1 479.8 515.3 704.3 979.5Add back: Noncash charges 60.3 67.5 68.9 72.2 80.2 85.3Less: Noncash income (45.2) (230.6) (199.3) (2C4.8) (209.2) (216.4)

Subtotal 133.4 173.0 349.4 382.7 575.3 848.4

Collections on long-term loans 451.7 586.5 668.2 787.7 932.5 1,115.1Collections on advances on guarantees 132.7 155.4 196.3 227.1 264.8 220.8Sale/redemption of long-term securities 12.0 404.2/a 8.7 7.9 11.1 9.6Increase in share capital 474.6 300.0 300.0 300.0 300.0 300.0BorrowingsDrawdown on foreign borrowings 2,224.0 1,016.2 980.6 1,050.4 1,500.0 1,500.0Domestic borrowings from:Central Bank 302.8 174.4 59.4 - 300.0 300.0Countryside bills 356.8 940.0 500.0 500.0 - -Other borrowings 672.3 1,065.0 953.4 675.0 1,047.9 980.0

Total borrowings 3.555.9 3,195.6 2,493.4 2,225.4 2.847.9 2,780.0

New deposits 3,704.8 4,368.0 5,292.0 5,292.0 5,292.0 5,292.0Increase in deferred credits 138.5 18.4 19.2 1.1 - -Decrease in other assets 29.7 295.8/b - - - -Increase in current liabilities /c - - - 52.5 4.2 0.4

Total sources 8.633.3 9,496.9 9.327.2 9,276.4 10,227.8 10,556.3

UsesDisbursement of loans 2,554.1 2,555.0 2,467.8 2,627.8 3,007.4 3,300.3Advances on guarantees 321.2 344.9 345.0 350.0 334.1 315.6Repayment of:Foreign borrowings 604.7 764.5 520.2 527.4 621.1 651.1Domestic borrowings 115.2 87.1 239.6 45.0 523.8 548.0

Subtotal 719.9 851.6 759.8 572.4 1,144.9 1,199.1

Deposit withdrawals 3,948.3 4,613.3 5,300.2 5,280.0 5,280.0 5,280.0New long-term investments 193.1 21.0 14.0 - - -Increase in acquired assets 50.7 10.0 10.0 10.0 10.0 10.0

Increase in other assets 57.7 37.6 16.1 16.4 16.6 17.0Increase in fixed assets 12.2 48.0 73.0 48.0 48.0 48.0Increase in current assets /d 708.6 1,013.4 317.1 371.1 376.4 383.9Decrease in current liabilities /c 43.0 17.6 24.7 - - _Decrease in deferred credits - - - - 9.6 11.7

Total uses 8,608.8 9,512.4 9,327.7 9,275.7 10,227.0 10,565.6

Increase/(decrease) in cash 24.5 (15.5) (0.5) 0.7 0.8 0.7Cash balance - beginning 184.4 208.8 193.3 192.8 193.5 194.3

Cash balance - end 208.9 193.3 192.8 193.5 194.3 195.0

Debt service coverage (times) 1.00 1.04 1.28 1.51 1.27 1.39

/a Includes proposed divestment of DBP's equity investment of P 397.6 million in Food Terminal Inc., NationalSteel Corporation and National Housing Corporation.

lb This figure represents recovery of advances against guarantees made to the three companies mentioned infootnote /a above.

/c Other than deposits and current maturities of long-term loans.

/d Other than cash and current portion of long-term loans.

AEP Projects DepartmentMarch 1, 1978

ANNEX 4T-25

PHILIPPINES

DEVELOPMENT BANK OF THE PHILIPPINES

Disbursement Schedule for the Proposed IBRD Loan /a(US$ millions)

Disbursements by quarter Total disbursementsLarge industry SMI PDB By quarter Cumulative

1978July-September 0.10 1.20/b - 1.30 1.30October-December 0.25 0.60 0.02 0.87 2.17

1979January-March 0.40 0.50 0.04 0.94 3.11April-June 0.-70 5.40 0.05 6.15 9.26July-September 1.00 3.15 0.10 4.25 13.51October-December 2.00 3.10 0.05 5.15 18.66

1980January-March 2.70 3.45 0.02 6.17 24.83April-June 3.70 3.30 0.02 7.02 31.85July-September 6.25 3.90 - 10.15 42.00October-December 8.40 4.00 - 12.40 54.40

1981January-March 10.60 0.80 - 11.40 65.80April-June 6.85 0.30 - 7.15 72.95July-September 5.20 - - 5.20 78.15October-December 0.80 - - 0.80 78.95

1982January-March 0.55 - - 0.55 79.50April-June 0.50 - - 0.50 80.00

/a Based on the assumption that the loan would become effective for drawdownsin early third quarter of 1978.

a Includes backlog of undisbursed commitments made in the second quarter of1978.

AEP Projects DepartmentMarch 1, 1978

PHILIPPINESDEVELOPMENT BANK OF THE PHILIPPINES

ORGANIZATION CHARTAS OF OCTOBER 1,1977

Boar of GOorroo

E awnment l l CwlS S NICE | 9 | Commiabn

| ot Ju;ice l l Commolon M L z man d .on -. d 0-

E~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~t v< L< EW

pW - .00 CT .n ,iE a o 0 01 0 1

0umr o f5af

oB -ToOsl 1055 B1B 1B71 LIIII _.J I ...j3.HBmnolr. 1031 7B3 1B30>

Tor0I 706b 1410 3501 [ i

World Bor - 1B5 E

ANNEX 5Page 1

PHILIPPINES

DEVELOPMENT BANK OF THE PHILIPPINES

Selected Data and Documents Available in the Project File

ReferenceNumber Title

Section A: Selected Reports on the Philippine Industrial, SMI andFinancial Sectors

Al BOI, "Philippine Industry and Development," Volumes I and II,4th Quarter 1976 and 1st Quarter 1977.

A2 The SGV Group, "Doing Business in the Philippines," Manila,February 1977.

A3 BOI, "Investment Opportunities in the Philippines," August 1977.A4 BOI, "Questions and Answers on Foreign Investments in the Philippines,"

August 1977.A5 NEDA-APO, "Agreement on Asean Preferential Trading Arrangements," 1977.A6 BOI, "Data on BOI Approved/Registered Projects," 1977.A7 NEDA-NCSO, "Journal of Philippine Statistics," 4th Quarter 1976.A8 NEDA, "Development Digest," April 1976.A9 DCP, "Development Plan to Year 2000," (undated).A10 UPISSI, "A Study of the Philippine Small- and Medium-Scale Industries,"

May 1977.All UPISSI, "An Analysis of the Impact of Thirteen Training Programs on

Entrepreneurship Development Conducted in 1973 and in 1974-75 (Phase I),"April 1977.

A12 Manila Stock Exchange, "Investment Guide 1976," 1976.A13 CB, "28th Annual Report," March 1977.A14 World Bank, "Report of the IBRD Review Mission to the Small Business

Advisory Centers of the Department of Industry, Government of thePhilippines," August 1977.

A15 World Bank, "Report of the 1977 IBRD Mission to the Industrial Guaranteeand Loan Fund," August 1977.

A16 World Bank, "The Philippine Country Economic Memorandum" Report No.1765-PH, October 1977.

A17 The SGV Group, Study of the Commercial Banks in the Philippines, 1976and 1977," 1976 and 1977.

Af8 ILO, "Sharing in Development: A Programme of Employment Equity andGrowth for the Philippines," 1974.

A19 World Bank, "The Philippines: Priorities and Prospects for Develop-ment," 1976.

ANNEX 5Page 2

ReferenceNumber Title

Section B: Selected Reports and Studies Relating to DBP

B1 DBP, "Annual Reports, 1973-74, 1974-75 and 1975-76 and Interim Report,July-December 1976," 1974, 1975, 1976 and 1977.

B2 DBP, "Manual of Project Supervision (Draft)," 1977.B3 DBP, "Accounting Manual," (Updated).B4 DBP, "Manual of Systems and Procedures for DBP Branches," April 1976.B5 DBP, "Econonic Impact of SMI Loans Financed by DBP Under Loans No.

1120-PH and 1190-PH," October 1977.B6 DBP, "Study on IPD II's Home, Small and Medium Scale Industrial Loan

Portfolio as of June 30, 1976," 1977.B7 DBP, "Financial Forecast of DBP Operations 1977-82," 1977.B8 DBP, "Annual Reports on PDBs 1971-1976," 1972-1977.B9 DBP, "Guide to the Audit of PDBs" (undated).B1O DBP, "Guideposts on PDBs," August 1977.B11 DBP, "A Lending Priority System for the Development Bank of the

Philippines," (Draft), March 1977.

Section C: Selected Working Papers and Tables Prepared by the Appraisal Mission

C1 "Report on Small and Medium Industry Component of the Proposed Loanto DBP" by World Bank Consultant, December 15, 1977.

C2 "Compilation of Data on Various Aspects of SMI Sector (Five Tables),"December 1977.

C3 "Working Papers on the Determination of the Indirect Foreign ExchangeComponents for Large Industry and SMI Projects," December 9, 1977.

C4 "Analysis of DBP's Guarantee Operations," (Four Tables), December 8,1977.

C5 "Agricultural Loans Approved by Products, FY76 and 77" (Table),October 1977.

C6 "Summary Statement of Acquired Assets, July 1, 1976 to June 30, 1977,"(Table), January 10, 1978.

C7 "List and Analysis of DBP's Equity Investments as of June 30, 1977,"October 1977.

C8 "Details of Deposits with DBP as of June 30, 1977," October 1977.C9 "Summary of Investment Operations," December 8, 1977.CIO "Statement Showing Analysis of DBP's Foreign Currency Borrowings as

of June 30, 1977," October 1977.Cll "Action Program for CY1977 Audit and Scope of 1977 Audit," September 1977.C12 "Analysis of DBP's Foreign Exchange Risk Exposure as 'of September 30,

1977 (Actual) and December 31, 1977 (Projected)," October 1977.C13 "Organization Chart of IPD I" (No. 18591), October 1, 1977.C14 "Old and New Organization Charts of a Model Branch," (Nos. 18534 and

18535, October 1977).

AEP Projects DepartmentMarch 1, 1978

IBRD 13448lien 12O~~~~~~~~~~~~~~~~~~~ 1240~~~~~~~~i MARCH 1978

CLASSIFICATION OF PROVINCES P1OHILIPPI NESBY GEOGRAPHICAL REGIONS DEVELOPMENT BANK CF THE PHILIPPINES

IILOCOS VI WESTERN VISAYAS E2 Nort 33 Capin Z' LOCATION OF DBP BRANCHES AND OFFICES

3 lontinSt 39 AntIq e AS OF OCTOBER 1, 1977

5 La Unr-,, 41 Negros Occidental6 Lenguit VIt CENTRAL ViSAYAS

Pangainan 43 Negros Oriental * DSP BRANHES

it CAtASAN VALLEY 44 Bohol * DfPSUB BRANCHES8 Batanes 45 Siguijor A91Cagpan V[tl EASTERNKV15AYAS cAGENCIES AND EXTENSION OFFICES10 Kabiega Apapa 46 16orthem Samar 6abuyan Channel - -_-_---_ PROVINCIAL BOUNDARIES

11 llebela 47 Samtar12 161u980 48 Eastern Samar_______n13 Nueva Vizcava 49 Leyte \p! H REGIONAL BOUNOARIES14 Qurino 50 Southern Leyte Laoa INTERNATIONAL BOUNDARIES

III CENTRAI LUZON :X WESTERN MINDANAO -15 Nueva Ecija 51 Zamboatiga del Norte N,16 Tariac 52 Zamboarnga del Sur 2 f Tugon rnn

S7 amSales 83 BasilanTaiO__ _ _ _ I18 Parnpanga 54 Sulu i19 Bulacnn 55 Twitawi a3 1 4 Ow20 Batean X NORTHERN MIND3ANAO ) '

IV SouTHERN TAGALOG 56 Surigao del Note 1221 Quezon 57 Camiguin Ssa . 9 1-

23 Caite 58 Agusan dei Norte t 2 224 Laguna 59 Misenris Oriental (k A 1 t3 ' 14 7 ) L, ,

t 25 Ratengas 60 Mitsamnis Ocridental I ' r j EIKttOMETES t6°-th 26 Marmnduque 61 Lanao del Norte 5S 03O 1D58 200

27 Mindoro Orientel 62 Lanao tei Sur ,MlEE28 Mindoro Occidental 63 Bjkidnon T I ES29 Romblon 64 Aguaan de,l SUr l6,( Sh

30 Palawan 65 Surigao del Sur 1 V SIKL Xi SOUTHERN MINDANAO An nirmO l 19

31 Carnarines Nprte 66 Maguindanoaq 18 j m32 Camariner Sur 67 North Cotbato e 2 p tV f 5 E A33 Cataniduefnes 6

8 Davao Be ~ n~ "P H IPP NSE34 Albay 69 Devao Oriental35 Sotstgon 70 Davao del Sur ,ni1SS

623 4/ 23 31j

36 Masbate N 1 Sultan Kudarat 4 N,mPa7b _K,r72 Sooth Cotabato N 25 , N,>

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