Banks and borrowers play roulette

Now that the Senate has passed its version of the Special Asset Management Companies (SAMC) bill a.k.a. Special Purpose Asset Vehicle (SPAV) bill, the stage is set for the bicameral conference.

And this could prove to be much more interesting since the House version passed early this year is reputedly pro-borrower while that of the Senate is pro-bank.

If there’s one thing that can be concluded in the process of passing this highly-contested and much-debated bill, it’s the fact that no one can predict what the final form will be. Watching the progress of a pending piece of legislation, and the SPAV bill is no exception, is like watching roulette; you’ll never know what the final number will be.

At this stage the banks cannot as yet whoop it up. At the bicameral committee, serious horse-trading starts and the end-game is not necessarily the way of the righteous. How the die will be cast, however, is topic for another day.

At the moment, let’s just appreciate the recent turn of events.

The roulette turns around

A few weeks ago in the Senate, everything was going in favor of the borrowers who were remiss of their obligations and whose assets that served as collateral are listed as burden of the banks.

In the original version of the Senate bill and the final version of the Lower House, the "delinquent" borrower may qualify as a SPAV and could bid for his mortgaged assets foreclosed or simply non-performing due to non-payment of obligations.

If the borrower manages to win the bidding, he’d get the chance to buy back his property at bargain price and even avail of the numerous tax perks being awarded to SPAVs or those who acquire non-performing assets.

As a bonus, the borrower, who may also be a SPAV, would walk away scot-free without paying his remaining due obligations with the debtor-bank. Under this version of the SPAV bill, borrowers would end up with nothing to lose, and even more to earn.

Let us assume that the borrower took a P10-million loan secured by a mortgage of a prime property. For some reason, he ends up paying only P2 million, or a fifth of the loan. His asset, predictably, is foreclosed and eventually put on the auction block. Because the borrower can bid for this property, let us further assume that the borrower was able to acquire the property by bidding at a 60-percent discount of the mortgaged amount or P4 million.

By buying back the property at only P4 million, the borrower walks away by effectively paying his bank the total amount of P6 million only out of his original P10-million loan, plus availing of all the tax perks.

Roulette turns bankers way

The banks’ lobby must have been very effective since under the approved version of the Senate, provisions that would unduly favor delinquent borrowers were removed. For now, the banks have the upper hand.

The right of a borrower to bid for his mortgaged assets has been kept, but not for assets that banks have foreclosed. The logic is simple: the banks, being the new owners of the foreclosed assets, should have the right to choose how to dispose of these properties (either through bidding or negotiated sale).

The deficiency claim–or the right of the banks or the SPAV to run after a borrower’s remaining obligation even if the assets have been sold–has been put in place. For the banks, this provision is crucial because it would impact both on its loan portfolio and the salability of the assets.

While some say this provision could be largely unfair to borrowers, the arithmetic proves otherwise.

Let’s take again the example of the P10-million loan with mortgaged asset. Say the asset was foreclosed when the borrower managed to pay only P2 million of the principal and none of the loan’s interest. If the bank sells the asset at a discounted amount of P5 million to a SPAV, the proceeds from the asset sale would simply be deducted from the borrower’s remaining obligations, and the borrower is still liable for the remaining balance.

Battle of the elite

It looks like the SPAV bill will turn out to be a battle between two elite forces: some 30 banks versus about 200 "influential" corporate and individual borrowers whose businesses have turned sour for one reason or the other. With P500 billion at stake, expect now that the "duel to death" is elevated to the bicameral committee level.

To begin with, the SPAV measure is really for the banking sector, a bailout of a beleaguered industry which resources have been placed in peril by rising level of bad debts and non-performing assets. The fact that for some of these loans the banks’ inefficiency or loose governance may have been the cause is another issue. The freeing up of these non-performing assets is vital to the rebound of the local economy.

And with the world melding fast into a single global marketplace, foreign investors like Lehman Brothers and Cerberus will not wait for our lawmakers to resolve local bank’s liquidity problem.

In the meantime, kudos goes to our senators who have tried to set aside differences and come to an agreement to resolve our banks’ liquidity problem. The bill’s economic benefits, hopefully, will far outweigh even the potential tax losses to the government, estimated at P80 billion.

The basic principles in banking–as in life–are simple: pay what you owe, honor your contracts and accept a certain degree of punishment if you don’t. These too are the basic principles an ideal SPAV bill should have.

However, after all is said and done, let’s watch what the final number would be in this roulette game between the bankers and the borrowers.

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"Isyung Kalakalan at iba pa" tackles the whereabouts of the additional tax imposed on the motorists starting year 2000, the Road Users’ Tax (RUT). Catch it on IBC-13 News from Monday to Friday, at 5 p.m. and 11 p.m.

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