MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) and the country’s major banking stakeholders are pushing for the passage of a bill that will establish special purpose vehicles for distressed loans and assets amid the coronavirus disease 2019 or COVID-19 pandemic.
BSP managing director Lyn Javier said the regulator is advocating for the early passage of Senate Bills 1594 and 1596 or the Financial Institutions Strategic Transfer (FIST) to help banks unload bad loans and assets through special purpose vehicles.
“The swift enactment of the FIST law, notwithstanding strong banking fundamentals, would promote investor and depositor confidence and mitigate the harmful feedback of a financial system in the country,” Javier recently told the Senate committee on banks, financial institutions, and currencies.
The FIST law encourages financial institutions to sell non-performing assets (NPAs) to asset management companies that specialize in the resolution of distressed assets, through fiscal incentives.
The law will authorize the Department of Finance (DOF) to extend two and five-year entitlement periods to avail of tax exemptions and fee privileges by a maximum of another two years and five years, respectively.
Other fiscal incentives include exemption from documentary stamp tax, capital gains tax, creditable withholding tax, and value-added tax or gross receipts tax, as well as a 50 percent reduction in the registration and transfer fees imposed by the Land Registration Authority, among others.
“The banking system has built-in buffers. There is, however, a limit to this risk bearing capacity. The establishment of resolution frameworks, such as the FIST law, will ensure that distressed financial institutions have a mechanism to strengthen their balance sheet,” Javier said.
Javier noted the non-performing loan (NPL) ratio of Philippine banks ballooned to 18.6 percent in 2001 from a range of three percent to 3.4 percent in the first half of 1997 during the Asian financial crisis, but improved to 2.2 percent from 8.6 percent during the global financial crisis in 2008.
Through Republic Act 9182 or the Special Purpose Vehicle Act of 2002, Javier said banks were able to offload P146.2 billion worth of NPAs mostly in the form of soured loans.
Javier said the SPV Act helped bring down the NPL ratio of Philippine banks to 2.6 percent in 2009 from 14.7 percent in end-2002.
A survey recently conducted by the BSP revealed the NPL ratio of the industry would almost double to 4.6 percent by the end of the year from 2.4 percent as of end-March due to the impact of the COVID-19 pandemic.
On the other hand, the industry’s capital adequacy ratio (CAR) will slightly decline to 14.8 percent this year from 15 percent as of end-March, well above the 10 percent threshold set by the BSP.
For his part, Bankers Association of the Philippines managing director Benjamin Castillo said the group is very supportive of the initiative taken by the Senate in pursuing the proposed bill.
“We believe this will prepare the banking system for the expected increase in the non-performing assets arising from the community quarantines that we have implemented to contain human damage,” Castillo said.
The economy stalled and shrank by nine percent in the first half of the year after Luzon was placed under enhanced community quarantine in the middle of March to prevent the spread of COVID-19.
The Development Budget Coordination Committee (DBCC) now expects a deeper GDP contraction of 4.4 percent to 6.6 percent instead of two percent to 3.4 percent this year.