Banking

By undertaking “enhanced community quarantine” measures, we managed to save our health system from collapsing in the face of a pandemic. Now, as we begin reopening the economy, we must also save our banking system.

The expected contraction of our economy, coming both as a consequence of the lockdown and the general retreat of the global economy, will bring tremendous pressures on our banking system. Those pressures will become evident as we grope toward the “new normal.”

From the outbreak of the pandemic, the banking system was asked to bear part of the burden of cushioning the impact of this health crisis on our people. The Bayanihan Act asked the banks to forego interest on interest (late payment financing charges) of borrowers who might need more time to repay their loans.

Although this is not without cost for the banks, they readily complied with the larger national welfare in mind. The industry relies on continues flow of repayments to earn enough to cover the costs of financial intermediation and cash services. Once that flow of repayments is interrupted, the banks will face serious difficulties.

During the first 45 days of the lockdown period, the IATF-TWG estimates borrowers failed to pay about P368 billion due. This is probably just the tip of the iceberg.

As businesses reopen, we can expect many bankruptcies to happen. A significant portion of bank capital available for lending will be trapped in past due accounts or bad loans.  

The first wave will likely happen in consumer lending activities, especially as we expect a spike in unemployment. People who took out car loans, for instance, and then suffered loss of income will default on their payments. Housing mortgages may not be serviced on time. Credit card payments may be deferred.

A second, even deadlier, wave happens when businesses big and small start failing in the new and hostile environment characterized by a global recession. In the second wave, loans will have to be restructured – if that is at all possible. In the event of bankruptcies, banks will end up accumulating acquired assets.

Anticipating this, Rep. Junie Cua introduced House Bill 6622 or the Philippine Banking Industry Resilience Act Against Covid19. The bill seeks to extend support to the financial institutions through tax exemptions and reduced registration and transfer fees on certain assets involving non-performing assets.

The bill expects our financial institutions will be “facing a period of delayed loan collections and are at risk of recording higher non-performing assets across all borrower segments.” To help the banks subsist through the coming period of difficulty, the bill proposes mechanisms to make it easier for banks to offload their non-performing assets. This might resemble the special purpose asset vehicles (SPAVs) provided for by law years back to help banks clean up their assets stockpile and strengthen their balance sheets.

When the SPAVs were made available, our banks bundled their non-performing assets and sold them to the big international investment banks at a discount. The challenge a new SPAV law might face today is that all other countries are borrowing from the investment banks to cover their deficits in a period of deep recession. The large investment banks might not be as interested in buying bundles of non-performing assets except at a very deep discount.

In addition, the P1.3 trillion stimulus package being considered by Congress allocates P650 billion for expanding the infra program, P300 billion to set up the National Emergency and Investment Corporation, P200 billion for wage subsidies and loans for small businesses and P128 billion for an expanded loan program for critically impacted businesses. Delivery of this ambitious stimulus package requires a fully functioning banking system to process the cash.

The first step, of course, is to avoid a worst-case scenario where bankruptcies happen like falling dominos. That could happen if, on top of adverse global conditions, the populists succeed in advancing their anti-business demands. Among such demands: waiver of consumer payments for utilities and indefinite postponement of loan repayments.

Such demands will kill the business environment and worsen economic conditions for our people.

As things stand, the banks are likely to adopt very conservative policies. They will be hesitant in lending out money to businesses that might seem less than viable. Several banks have suspended issuance of new credit cards to mitigate risks.

Those seeking to score cheap populist points have demanded that banks be made to postpone collections without charges and lend money to distressed enterprises. These are propositions that could severely weaken our banking system and produce worse economic conditions down the road.

It is true that when the pandemic struck, we had a very strong banking sector. Tight regulation of the banking system and the inherent conservatism saw to that.

But the recession has severely weakened our banking sector. At this point, we do not know where the bottom is.

Some of our large companies and many of our small enterprises are in severe financial pain. Our retail sector has been hit badly and that will reverberate down the value chain, adversely affecting the tens of thousands of small enterprises that employ millions.

We will go through a difficult path, rebuilding our supply and value chains. Some enterprises will fail while others will recover. If things get any worse, some of our banks may actually fail.

The banking sector cannot be assigned to play the role of a white knight rescuing every company in distress. Businesses will need time to recover, perhaps even reinvent themselves.

The banks, too, will need some policy support to get through this tough time.