In its post-program monitoring report, the IMF urged the government to "contain risks from regulatory forbearance" while strengthening reform efforts in the financial sector.
IMF resident representative Vikram Haksar told reporters that there are huge funds ready to invest on the high-risk acquisition of non-performing loans from the banking system, but there is a need to jumpstart the process in order to relieve the banks of their bad loans.
Despite its optimism, however, the IMF warned that government should not risk easing its regulatory policies to fasttrack the recovery of the banking sector. "It is something you want to do as little as possible," he said.
The Bangko Sentral ng Pilipinas (BSP) had earlier issued the implementing guidelines for the Special Purpose Vehicle Act (SPVA), implementing the provision that allowed banks to book their losses from the sale of non-performing loans (NPLs) over a period of seven years.
This, however, is contrary to international practice which would have required banks to take a one-shot hit up front when they sell their NPLs to special purpose vehicles created for the purpose.
According to Haksar, the government is performing a delicate balancing act between the urgent need to lead the banking sector towards recovery and the need to stay within internationally accepted standards and practices.
On the other hand, Haksar said the IMF welcomed the possibility of enticing multilateral funds and agencies to help jumpstart the process of allowing banks to unload their NPLs through SPVs.
"There’s a lot of money out there that are attracted to these big-stake but high-risk investments but the downside of high risks is low price," Haksar said. "It’s the kind of situation that if you get a few high-profile deals completed, it can jumpstart the whole process."
The BSP has been able to persuade the Asian Development Bank (ADB) and the International Finance Corp. (IFC) to provide funding for venture capitalists interested in acquiring non-performing loans and assets of banks in an attempt to jumpstart the effort to take out bad loans from the banking system.
Despite the incentives provided under the new Special Purpose Vehicle Act, the response of asset management companies have been flaccid and bank regulators said there is a need to break the impasse between banks and interested venture capitalists.
BSP governor Rafael Buenaventura said both the ADB and IFC are in negotiations with different asset management companies for a possible joint-undertaking that would allow banks to sell their bad loans and bad assets.
According to Haksar, this was a positive move. "You really need good news here. Once deals start happening, it can spur other deals and the process would start rolling," he said.
A number of asset management companies have been interested in acquiring NPLs and non-performing assets (NPAs) from local banks but talks have been stalled by disagreements over pricing, Buenaventura said.
"By their very nature, venture capitalists invest in high-risk investments from which they expect high returns," Buenaventura explained. "So it is natural for them to be aggressive in their pricing of the NPLs and NPAs they want to acquire."
The principle of SPVA allowed venture capitalists and asset management companies to acquire NPLs and NPAs from banks at a discount and the new law provided various tax breaks and other perks to encourage them to help banks clean out their loan portfolio.
However, Buenaventura said local banks are having difficulties accepting the write-offs from these transactions, despite the need for the banking industry to unload some of the P257.028 billion worth of NPLs that have accumulated as of May this year.