The amended provisions give banks, among other things, longer time to book their losses when they sell their bad loans and bad assets to asset management companies.
The amendments to the implementing rules and regulations (IRR) were approved by the Monetary Board, easing several key provisions that have been used as an excuse by banks not to unload their non-performing assets (NPAs) and non-performing loans (NPLs).
"Now they have no more excuse," said BSP Governor Rafael B. Buenaventura. "We’ve liberalized several provisions of the IRR and it will now boil down to price negotiations between the banks and their buyers."
Despite the push from the BSP, no bank has ever sold any bad loan or bad asset except through individual sale of foreclosed assets to individual buyers.
To date, the universal and commercial banking industry alone have about P254.513 billion in non performing loans, accounting for over 15 percent of the industry’s total loan portfolio, a ratio way above the international norm of 10 percent and below.
According to Buenaventura, amendments will remove what the banking industry has been using as the reasons for their reluctance to sell their NPAs and NPLs.
Under the amended provisions of the IRR, banks now have 10 instead of only seven years to book the losses they would incur when they sell their NPL or NPA portfolio to interested special purpose vehicles (SPVs).
This way, Buenaventura said, banks would not have to take a single big hit when they sell their bad loans at a discount. "Now they have 10 years to slowly book these losses so their financials won’t look too bad."
BSP Assistant Governor Nestor Espenilla told reporters that this key amendment was "back-loaded" so that the larger portion of the losses could be booked towards the end of the 10-year period.
Espenilla said the BSP also allowed banks the flexibility of freeing up the provisions for the bad loans to be used as provisioning for other bad loans that were not part of the sale.
Under the old IRR, the provisioning for sold NPAs are lumped back into the bank’s general provisioning. The amendment means that when banks sell NPAs that already have provisioning, the bank could use that amount as provisioning for other NPAs that would be retained by the bank.
"But that’s all they can use it for," Espenilla pointed out. "These freed-up provisions could only be utilized as provisioning for other NPAs."
The third amendment, Espenilla said, would allow banks to declare cash dividends to their equity holders if there is a surplus left over from the staggered booking of the loss from the sale of the bad loans.
"Remember that whole idea of the SPVA is not just to unload bad loans," he said. "It’s also a recapitalization exercise."