The Bangko Sentral ng Pilipinas (BSP) is circulating three draft rules on the implementation of the recently-approved Financial Institutions Strategic Transfer (FIST) Act that includes proposed guidelines on eligibility issues and how banks’ soured assets will be treated under the new law.
The proposed circular was on the transfer/sale of non-performing assets (NPAs) to a FIST corporation or FISTC, special purpose vehicle (SPV) or to an individual under the FIST law and banks’ guidance on the prudential treatment of sale/transfer of NPAs to avail of the tax exemptions and other incentives and privileges.
In a virtual briefing Wednesday (“Philippine Banks: Buffers Won’t Hold If COVID Comes Back”) S&P Global Ratings associate director for financial institutions ratings, Nikita Anand, said that while FIST details are still being ironed out, the bare facts point to benefits that the law could bring to banks coping with the adverse impact of the year-long pandemic.
“It’s a bit early to establish the success of FIST today. The devil will be in the details and we’ll wait for that,” said Anand. In a previous S&P report (February 22) — and she repeated the same data yesterday — she said local banks’ non-performing loans (NPL) ratio could increase from three-percent level in 2020 to six percent this year with a still high bad loans provisioning cost of near two percent.
“The real reduction in NPLs will depend on these (FIST) operational details. The other challenge is in the nature of NPLs,” according to Anand. NPLs are expected to peak in the second half of 2021 due to loan moratoriums and the phaseout of fiscal support. Consumer and micro SME loans, for example, will have “high new NPL formation”. The surge in consumer NPLs reflect loss of household income due to the long lockdown. The same delay in reopening the economy are also restricting corporate borrowers.
Generally, the S&P analyst said recovery of corporate loans can be time consuming and that is where these FIST asset management companies add value. However since most NPLs – at least in this credit cycle these are small loans or retail loans such as consumer loans from housing, car and MSME loans – Anand said not all banks will offload especially large banks with “reasonable expertise” in collecting, enforcement and recovery of mortgage loans. “Rebound in economic activity as well as ultra-low interest rates should support borrowers’ repayment ability in 2022,” she added.
FIST is not yet included in the S&P latest assessment and projections for Philippine banks, said Anand. “Basically, it’s a law which allows banks to default their NPLs to asset management companies. … on the face of it this could benefit banks that management, time and resources are not spent on recovery and collection (for soured) loans. They can focus on growth and economic recovery.”
“We’ll watch out for the exact details of how these arrangement will go about,” said Anand. She expects some execution and implementation challenges that need to be addressed particularly on write-off issues, the nature of the sale of NPAs, banks’ exposure in the loan books and if these will be “completely” taken off after the transactions.
In the meantime, on the three FIST-related rules prepared by the BSP, the central bank is giving the banking community until March 8 to submit feebacks on the proposed FIST implementation.
Banks are also given until Monday next week to react or make suggestions with regards to two memorandum proposals on the prudential treatment of transactions under FIST and the guidelines for obtaining a certificate of eligibility as prescribed under the law.
BSP Governor Benjamin E. Diokno in the FIST draft circular said the guidelines are for all banks, government and private, and for other credit granting institutions under BSP supervision included in the FIST law (Republic Act No. 11523) and its implementing rules and regulations.
“The implementation of the FIST Act reinforces the BSP-supervised financial institutions’ (BSFIs’) primary role of providing financial services and liquidity to support households, business enterprises and productive sectors of the economy by allowing BSFIs to dispose of their non-performing assets and increase their risk-bearing capacity,” said Diokno. The draft circular laid out the sale/transfer transactions of NPAs by BSFIs “for purposes of availing of the tax exemptions and incentives/privileges under the FIST Act and its IRR”.
Last month, when the FIST Act was signed into law, Diokno said this will significantly decrease banks’ NPL ratio and encourage deposits and investments. He noted that FIST will reduce the NPL ratio by about 0.63 to 7.0 percentage point.
The BSP and banking industry have pushed for the FIST law as a safetynet for banks overburdened by NPAs because of the pandemic. Banks’ disposal of NPAs to asset management companies that specialize in the resolution of distressed assets will unburden the financial system since these asset management companies will have perks such as tax exemptions and reduced registration and transfer fees on certain transactions.