RP draws up laws for foreign investors to buy up bad loans

The Philippines is preparing a set of laws to pave the way for foreign investors to buy up ballooning bad loans at local banks, the central bank said yesterday.

Among those that have expressed interest in buying up the non-performing loans (NPLs) of Philippine banks are US investment house Lehman Brothers Holdings Inc. and the World Bank’s International Finance Corp. (IFC).

Lehman Brothers has reportedly pledged to invest $1 billion in such a venture.

Bangko Sentral ng Pilipinas Governor Rafael Buenaventura said he was confident legislation covering the purchase of bad loans could be in place by March.

The legislation, he said, was needed to make the NPLs attractive to buyers and clear up any legal questions over such loan transfers.

Among laws being prepared in Congress is one allowing the establishment of asset management companies to absorb the NPLs which were earlier estimated at about P470 billion, officials said.

Another proposed law will delineate rules covering corporate bankruptcies and the restructuring of such firms, Buenaventura said.

"Clearly in the case of the NPLs, the rules of the game have to be spelled out so there is no misunderstanding... in terms of what is taxable, what is not taxable, what is subject to fees, what is subject to transfer taxes and all that," Buenaventura said.

He said such "friction costs" incurred when an asset is transferred from one company to another, can amount to as much as 10 percent of the cost, making it unprofitable to buy NPLs.

Even the issue of whether foreigners can own property, even temporarily, has to be cleared up, Buenaventura said.

Local law bans foreigners from owning land and other selected real estate. This could technically prevent a foreign firm from holding a foreclosed asset.

Buenaventura said he was hopeful Lehman Brothers could sign a memorandum of understanding on its planned purchase of certain NPLs later this month to help spur investments.

Reports in local newspapers have said Lehman Brothers would set up a "Philippine Recovery Fund" that would be used to buy up the NPLs and real estate assets of government and private institutions and to fund housing and infrastructure projects.

Buenaventura said it is crucial to create an agency to allow banks to sell their NPLs "in order to spur our banks to continue lending.

"They need to get rid of some of their non-performing loans and be able to achieve some measure of liquidity," he said, remarking that NPLs now amount to about 19 percent of the banking system’s total loans.