BSP mulls reward system for disposal of banks’ bad loans

The Bangko Sentral ng Pilipinas (BSP) is mulling a reward system for banks that manage to keep their bad loans under control while penalizing other banks for failure to do so.

The BSP said it is planning to impose tighter regulations on non-performing loans (NPL) by holding back certain privileges of banks that fail to bring down their NPL ratios.

The new policy will come ahead of the expiration of the government incentives on the sale of bad loans to asset management companies under the Special Purpose Vehicles Act (SPVA) which gives a limited window of opportunity for banks to pare down their NPLs.

The BSP said no bank has ever succeeded in disposing of its NPL portfolio because banks are unwilling to take a loss when selling their bad loans at a discount.

According to BSP deputy governor Alberto Reyes, banks will have to deal with tighter NPL compliance rules even before the SPVA incentives disappear.

"Good banks that have been able to keep their NPL ratio at good levels will probably be rewarded with, say, more branches," Reyes said. "When a bank has persistently failed to keep their NPL ratio down, we’ll hold back certain privileges."

According to Reyes, the BSP wants to see a reduction in the volume of bad loans, not just in the overall ratio. This means banks can not simply increase their total loan portfolio to reduce their ratio.

"We want them to unload their NPLs. Whether they do it under SPVA or not will be up to them."

Reyes said banks that have large NPL portfolios will be required to submit a comprehensive NPL reduction program that they will be compelled to implement strictly.

"When they fail to implement their own programs and meet their own targets, that’s when we will start withholding their privileges or penalizing them," Reyes said.

On the other hand, Reyes said the BSP intends to be generous with banks whose NPLs have been reduced at least to within the industry standard.