Senate begins plenary discussions on bill to allow banks, financial institutions to dispose of bad loans

Published September 28, 2020, 8:36 PM

by Vanne Elaine Terrazola

The Senate has begun plenary discussions on the bill that would allow banks and financial institutions to dispose of their bad loans and help them cope with the COVID-19 crisis.


Senator Grace Poe, chairperson of the Senate Committee on Banks, Financial Institutions and Currencies, sponsored during their Monday plenary session the approval of the Senate Bill No. 1849, or the proposed Financial Institutions Strategic Transfer (FIST) Act.

The bill was contained in the Committee Report No. 116 signed by 19 senators.

Poe said the FIST bill is another proactive response to the impacts of the pandemic and is equally important as the Bayanihan 1 and Bayanihan 2 laws in terms of reviving the economy.

“This [proposed] law’s primary objective is really to keep the banking sector above water during this crisis. Before the banks can help MSMEs, we must help the banks first,” she said in her speech.

The measure seeks to authorize banks and financial institutions to sell their non-performing asset or loans to asset management or FIST companies thru the grant of incentives.

Institutions covered under the Special Purpose Vehicle Act of 2002 were expanded to include lending companies and other institutions licensed by the Bangko Sentral ng Pilipinas to perform credit-granting companies, Poe said.

Under the bill, the sales and transfers shall be contained in a database to be submitted by FIST corporations to regulatory agencies monthly for proper monitoring and assessment of the impact of incentives availment.

To prevent abuse of the system, Poe said one-person corporations would be prohibited to set up their own FIST corporations, as well as government financial institutions.

To address possible violations of the anti-dummy law, foreign participation in foreclosure sales of lands is removed and the Securities and Exchange Commission and the Department of Justice are given the power and responsibility to investigate violations.

Applications shall be extended to 36 months for non-performing assets as of Dec. 31, 2021. 

“Longer application and applicability periods mean more time for financial institutions to harness the full benefits of the law. This period will give sufficient time to financial institutions to assess the need to offload bad assets,” Poe explained.

Also, usual remedies which result in protracted litigation, like injunctions or equitable right of redemption under Article 1634 of the New Civil Code, shall not be allowed against the transfer of assets. 

“For clarity and to avoid any further litigation, it is now expressly stated that while notice to all affected parties is necessary, the consent of the borrower is no longer required,” she said.

The borrower, however, shall still be given a period of at most 90 days to restructure or renegotiate the loan. The rights of borrowers under existing laws shall not be impaired nor diminished. A consumer protection mechanism shall also be set up, she added.

There shall be a two-year and a five-year entitlement period for availment of fiscal incentives for all transfers from the financial institutions to FIST corporations and from FIST corporations to a third party, respectively. 

If signed into law, Poe said violators could be slapped with penalties.

Aside from the suspension or revocation of the approved FIST Corp. Plan, a fine of P10,000 to P1 million plus P2,000 for every day of violation may be imposed. Administrative sanctions under applicable laws shall also apply, she said.

Citing estimates from the National Economic and Development Authority, Poe said the bill is expected to free up P1.19 trillion worth of loans from the sale of non-performing assets.

“This, in turn, could help serve around 600,000 micro, small, and medium enterprises (MSMEs), and save over 3.5 million related jobs,” Poe said.

The Bangko Sentral ng Pilipinas (BSP) said non-performing assets could reach up to P635 billion by the end of 2020.

While BSP Governor Benjamin Diokno assured that that the country’s banking system has built-in buffers, Poe said there are limitations to this risk-bearing capacity. The failure to prepare of the increase of bad loans could also “adversely affect” the confidence of investors, a BSP official also said in a Senate hearing.

“The swift enactment of this law will promote investor and depositor confidence, and mitigate the effects of the crisis,” Poe said.