BSP extends relief on disposal of bad assets

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) has extended a prudential relief for banks and financial institutions on the treatment of losses arising from the sale or transfer of bad assets.

BSP Deputy Governor Chuchi Fonacier said the Monetary Board has approved the prudential relief under Republic Act 11523 or the Financial Institutions Strategic Transfer (FIST) Act.

Fonacier said the regulator has given BSP-supervised financial institutions an option to defer loss arising from the sale or transfer of non-performing assets (NPAs) under the FIST Act up to a maximum period of five years from the date of sale or transfer of the NPAs for prudential reporting purposes, subject to prior approval of the central bank.

In determining the gain or loss on sale or transfer of NPAs to a FIST corporation, Fonacier said financial instruments that are received by a BSFI as consideration for the sale or transfer of NPAs shall be recorded in accordance with the provisions of Philippine Financial Reporting Standards (PFRS) on financial instruments.

If the fair value of the said financial instruments could not be readily determined due to the absence of a quoted price, Fonacier said the BSFI shall ensure that it can provide the BSP with the basis for the fair valuation of such financial instruments in accordance with the provisions of PFRS on fair value measurement.

However, Fonacier pointed out that such basis should be supported by the opinion of a third-party external auditor acceptable to the BSP and should be made available to the appropriate supervising department of the central bank upon request.

If the fair value of financial instruments received as consideration for the NPAs sold or transferred under the FIST Act could not be established in accordance with these requirements, Fonacier said the BSFI should record these financial instruments upon initial recognition at the net carrying amount of the NPAs sold or transferred less cash received.

“No gain or loss shall be recorded by the BSFI on the sale or transfer transaction,” Fonacier said.

According to the BSP, a BSFI that is allowed by the central bank to defer the recording of loss on the sale or transfer of NPAs under the FIST Act and write it down uniformly over the period allowed by the BSP, shall, likewise, adopt the same in determining compliance with prudential requirements such as minimum capital requirements, risk-based capital adequacy ratio, and in computing adjusted net worth for purposes of complying with minimum prudential requirements such as the single borrower’s limit.

Banks availing of the prudential relief measures, should provide disclosures in its published balance sheet as well as annual report.

The BSP sees the banking industry’s non-performing loan (NPL) ratio peaking at 8.2 percent this year. The ratio eased to below four percent in May due to the continued reopening of the economy as COVID cases decline.