Banks to continue sale of bad assets even without perks

Even without the incentives under the Special Purpose Vehicle Act (SPVA), banks would be compelled to dispose of unproductive assets that continue to weigh down the industry, the Bangko Sentral ng Pilipinas (BSP) said.

The SPVA incentives expired in April this year, but BSP Deputy Governor Amando M. Tetangco said the central bank intends to further push banks to clean up their portfolio.

Congress is currently deliberating on the proposed two-year extension of the SPVA incentives but even without these perks, Tetangco said banks should sustain efforts to complete the asset clean-up.

The SPVA provided tax incentives for the discounted sale of non-performing assets (NPAs) while also allowing banks to book the attendant losses over a period of up to seven years.

Since then, Tetangco said banks have taken decisive steps to dispose of their NPAs through the SPVA. At the end of the program, the BSP estimates that about P103 billion would have been transferred to SPVs.

"This amount is equivalent to about 20 percent of the peak level of NPAs," Tetangco said.

He said banks would begin to feel the urgency to clean up NPAs, which eat up on their capital position especially as the industry shifts towards compliance with International Accounting Standards (IAS) by end-2005.

The BSP has already adjusted and increased the risk-weighting of the non-performing exposures of banks in order to force them to unload these assets.

On the other hand, the BSP also lowered the capital charge for high-quality credits.

In the new regulation, the BSP said the minimum capital charge for high-quality credit has been reduced from 10 percent to only two percent through a reduction in their assigned risk weight.

These so-called high quality credit refers to banks’ holdings of corporate debt securities and loans to companies which are considered of high quality, rated at least "AA-" or its equivalent by BSP-accredited credit rating agencies.

The BSP said it is also increasing the minimum capital charge for non-performing loans (NPLs) from 10 percent to 15 percent through an increase in assigned risk weight.

"The adjustment will reflect the difference between non-performing loans and performing loans," Tetangco said.

Increasing the capital charge for non-performing exposures is expected to motivate banks to accelerate their disposition of bad assets, the BSP official said.

He added that 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. 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.