Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno said soured assets incurred by banks could decline by at least P152 billion or 30 percent of the current P508.74 billion non-performing assets (NPAs) under the Financial Institutions Strategic Transfer (FIST) law.
Diokno’s estimate is based on the previous law, the Special Purpose Vehicle (SPV) Act of 2002 — adopted four years after the 1997 Asian Financial Crisis – which freed the banking system of 30 percent of its bad assets.
“During the Asian Financial Crisis around 30 percent of the banks NPAs were sold under the SPV Act. My estimate is that the same proportion of NPAs will be sold by BSFIs (BSP supervised financial institutions) under FIST Act,” said Diokno during his weekly virtual “GBED Talks”.
“Given the enhanced feature of the FIST law, that’s even a conservative estimate (P152 billion),” he added.
Diokno also said banks’ non-performing loans (NPL) ratio will decrease by 0.63 to 0.71 percentage points within two years of the FIST implementation.
“We expect a reduction in NPL ratio to happen during the first two years of the effectivity of the FIST Act” with the tax exemptions and fee privileges under the law, said Diokno.
Amid the COVID-19 pandemic, the industry’s NPL ratio went up to 3.6 percent at end-2020 from two percent in 2019. The 46 big banks’ NPL ratio rose to 3.1 percent from last year’s 1.6 percent ratio, while the ratio for thrift banks and rural/cooperative banks increased to 7.9 percent and 13.5 percent, respectively, from six percent and 10.5 percent ratio in 2019.
Diokno said sales or transfers of NPA from financial institutions to a FIST corporation are transfers by way of dacion in payment by the borrower or by third-party financial institutions and these are “entitled to the privileges enumerated under Section 15 of the law for a period not more than two years from the date of effectivity”.
“So, this two-year deadline dictates a great sense of urgency and so parties concerned should be decisive,” said Diokno.
The BSP has no report yet on the number of FIST corporations but there were several financial institutions that have expressed interests to set up this enhanced SPV versions.
The FIST Act or Republic Act No. 11523 took effect on February 18. It allowed banks to easily dispose of their NPAs via asset management companies to free up bank liquidity and to boost lending to critical sectors needed to reenergize the economy in recession.
To encourage banks to make use of the law, the BSP has simplified the procedures for application of the certificate of eligibility (COE) of non-performing assets. COEs will be issued by the BSP, the Securities and Exchange Commission or the Insurance Commission for tax exemptions and fee privileges.
“The timing of the passage of this law is significant. In the past, in response to the Asian Financial Crisis (was) passed four years after the crisis,” said Diokno. “This time, the law was passed on the same year of the crisis and incorporates lessons from the Asian Financial Crisis. We are more prepared this time around.”
Aside from banks, entities covered by the law include financing companies, investment houses, lending companies, accredited microfinance non-government organizations, insurance companies, government financial institutions, government owned or controlled corporations, non-stock savings and loan associations, and non-bank credit card issuers.
Financial institutions are allowed to unload their NPAs to FIST corporations which specialize in the resolution of distressed assets. Incentives not only include tax exemptions but also reduced registration and transfer fees on certain transactions.