Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno said the new law that will help the domestic financial system manage its bad debts during the health crisis and post-pandemic, will significantly decrease banks’ soured loans ratio and encourage deposits and investments.

Diokno is referring to the Financial Institutions Strategic Transfer (FIST) Act or Republic No. 11523 which was recently signed into law by President Duterte.

“FIST is expected to reduce the NPL (non-performing loan) ratio by about 0.63 to 7.0 percentage point,” said Diokno. He said FIST was a necessary measure for banks in handling NPL and non-performing assets (NPA). It is similar to the Special Purpose Vehicle (SPV) Act of the early 2000 but the enhanced SPV version is however more flexible and will inspire investor and depositor confidence and lead to efficient conduct of financial intermediation.

Diokno late Tuesday said this is “great news” and that FIST law “will allow banks to easily dispose bad assets through asset management companies.”

“The new law will help keep the banking system stable despite the effects of the COVID-19 pandemic. It will ease the NPL ratios of banks moving forward,” he said.

“Anticipating the signing of the FIST bill into law, the draft IRR (implementing rules and regulations) is already with SEC (with inputs from BSP) as the lead agency. The said IRR is being circulated to the industry for comments,” said Diokno.

Management Association of the Philippines (MAP) president Aurelio “Gigi” R. Montinola III on Wednesday also issued a statement thanking Congress for passing the FIST and for President Duterte for signing it into law, finally.

Montinola, former Bankers Association of the Philippines president, and ex-CEO and president of Bank of the Philippine Islands, said the “new law is one of the pillars under the government’s national economic recovery program (and it) lays down an enabling environment for our banking industry to continue lending to the private sector."

"With this new law and the recently passed CREATE (Corporate Recovery and Tax Incentives for Enterprises) bill, we are hopeful that our economy will get rehabilitated earlier than expected for the sake of our countrymen,” said Montinola.

The BSP and banking industry have pushed for the FIST law as a safetynet for banks overburdened by NPAs because of the pandemic.

Diokno has said that the law will complement the regulatory and supervisory initiatives of the BSP to mitigate the adverse effect of the pandemic.

The FIST law will encourage financial institutions to sell their NPAs to asset management companies that specialize in the resolution of distressed assets. These asset management companies will have perks such as tax exemptions and reduced registration and transfer fees on certain transactions.

Basically, FIST is expected to mobilize savings and investments for the country’s quicker recovery post-pandemic.

Diokno said previously that the banking system can tolerate an NPL of five percent. NPL ratios indicate a weakness in the financial system and “poor state of the economy” when it is on the high side.

Based on a BSP survey of banks, they had expected an NPL ratio of 4.6 percent by end-2020. A banking sector estimate, in the meantime, has put the range of end-2020 NPL ratio to three percent to four percent, and five to six percent this year.

With BSP's regulatory relief measures and extreme prudence by banks during the first pandemic year, actual NPL ratio end-2020, according to preliminary central bank data, increased to 3.61 percent versus 2.04 percent in 2019. The net NPL ratio stood at 1.98 percent from 1.06 percent. The BSP since 2017 refer to net NPLs to gross NPLs as less specific allowance for credit losses on NPLs.