Banks rush to beat deadline for SPV perks

As banks rushed to beat the April deadline under the Special Purpose Vehicles Act (SPVA), the Bangko Sentral ng Pilipinas (BSP) said yesterday it expects total applications for incentives to reach over P90 billion worth of bad loans and bad assets.

As of March 31, 2005, the BSP reported that completed SPVA transactions have reached P50 billion and another P40 billion was in the pipeline for completion.

BSP Assistant Governor Nestor Espenilla told reporters that the total amount was not likely to reach P100 billion, but said the amount would easily go over the P90-billion benchmark.

Espenilla said these non-performing loans and non-performing assets were either sold or going to be sold by banks in time to qualify for incentives under the SPVA which expired yesterday.

Espenilla said the P90-billion total already includes the P11.9 billion worth of non-performing loans sold by the United Coconut Planters Bank (UCPB) which officially signed off the entire portfolio on Monday.

The BSP has admitted that it is powerless to actually compel banks to take a haircut and unload their bad assets at a loss, but regulators still decided to assign higher risk-weighting on bad loans and bad assets to force banks to unload.

The carrot-and-stick approach, according to Espenilla, should compel banks to take more aggressive steps to reduce their NPL levels or incur more costs in supporting their NPLs.

"If banks don’t sell their NPLs, they only appear they’re not losing in their books," Espenilla explained. "But in reality, a lot of them have to actually borrow in order to support their high levels of NPLs. It’s throwing good money after bad."

According to Espenilla, raising the risk-weighting of NPLs and NPAs would consequently force banks to set aside higher reserves to cover their NPLs and NPAs. The higher the reserve requirement, the less money they have to lend and invest.

"Ultimately, banks with high levels of NPAs would be forced to raise their capital just to support their bad assets and bad loans," he pointed out. "Even if they have to take a deep discount when selling their bad assets and loans, it would still be cheaper to sell than to retain them in their books."

According to the BSP, the predominant trend was for banks to individually sell their bad loans and bad assets to individual buyers to maximize value, instead of lumping them together and unloading them wholesale.

The BSP said the transfer of NPAs to individual buyers was moving faster than the bulk transfer to SPVs because, despite their number, it was easier to discuss individual pricing with individual buyers rather than negotiate for an entire portfolio of assets.

Banks have been holding off plans to transfer their NPAs under the new law pending the decision on whether the BSP would allow the staggered booking of losses arising from the discounted sale of non-performing assets, despite its deviation from international accounting standards.

After the BSP approved the accounting guidelines for the sale of NPAs, banks went on to formally apply for incentives and the rule that enabled them to window-dress the entry of losses in their books of accounts, subject to full disclosure requirements.

This way, bank would not have to take a single big hit when they sell their NPAs to an SPV. They would be able to "ration" the losses up to seven years for accounting and tax purposes.