Banks seen to offload P152 billion in bad assets under FIST law

MANILA, Philippines — Banks are expected to dispose about P152 billion worth of non-performing assets (NPAs) under a new law allowing the industry to offload soured loans, even at substantial discount, to ensure a sound and safe financial system amid the global health crisis, according to the Bangko Sentral ng Pilipinas (BSP).

BSP Governor Benjamin Diokno said in his weekly virtual press conference that the amount to be disposed under Republic Act 11523 or the Financial Institutions Strategic Transfer (FIST) Act is equivalent to about 30 percent of the industry’s NPAs that stood at P508 billion as of end-December.

Diokno said the law would also reduce the non-performing loan (NPL) ratio of Philippine banks starting the second year of the implementation of the law.

“With FIST, non-performing loans ratio of banks is expected to decline by 0.63 to 0.71 percentage points,” Diokno told reporters.

NPLs or bad debts refer to past due loan accounts where the principal or interest is unpaid for 30 days or more after due date. A high NPL ratio indicates weakness in the financial system and poor state of the economy.

The asset quality of the banking sector deteriorated anew as gross NPL ratio increased to 3.7 percent in January after easing to 3.61 percent in December as the mandated 60-day debt moratorium expired last year.

Soured loans soared 66.9 percent to P392.26 billion in January from P234.987 billion in the same month last year, while the industry’s loan book contracted by 2.6 percent to P10.68 trillion from P10.89 trillion as banks remain risk averse due to uncertainties about the paying capacity of borrowers.

In anticipation of rising defaults brought about by uncertainties due to the global health crisis, the industry allowance for credit losses jumped 72.4 percent to P371.1 billion from P215.2 billion, representing a loan loss reserve ratio of 3.5 percent.

The new law is similar to Republic Act 9182 or the Special Purpose Vehicle Act of 2002 that allowed the establishment and registration of special purpose vehicles to acquire non-performing assets and dispose of them in the market after the Asian financial crisis in 1997 and 1998.

The BSP chief said banks were able to dispose 30 percent of their NPAs under the SPV law that was passed four years after the Asian financial crisis.

“This time, the law was passed on the same year of the crisis. At the same time, the new law incorporates lessons from the Asian financial crisis. We are better prepared this time around. By allowing banks to easily dispose of their bad assets through asset management companies, the law will help ease banks’ exposure to bad debts,” Diokno said.

To encourage banks to dispose of bad assets, the BSP streamlined the procedures for application of the certificate of eligibility (COE) of NPAs. The BSP, the Securities and Exchange Commission (SEC), and the Insurance Commission would issue the COE for the purpose of obtaining tax exemptions and fee privileges.

Aside from banks, entities covered by the law include financing companies, investment houses, lending companies, accredited microfinance non-government organizations, insurance companies, government financial institutions, government owned or controlled corporations, non-stock savings and loan associations, and non-bank credit card issuers.

The law seeks to urge financial institutions to sell NPAs to FIST corporations that specialize in resolution of distressed assets by providing incentives, such as tax exemptions and reduced registration and transfer fees on certain transactions.

Last March 18, the central bank’s Monetary Board approved the IRR, which was transmitted to the SEC the following day. Further revisions in the draft IRR are being made before its publication.

Diokno said the BSP also supports the implementation of RA 11534 or the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act that will lower the corporate income tax to 20 percent from 30 percent.