Regulators to shore up PH insolvency system

The country is in dire need of reforms in the resolution of insolvency of corporations and individuals which, if overlooked, could cause harmful stress points in the financial system and the real economy.

According to the Bangko Sentral ng Pilipinas (BSP), most Asian markets including the Philippines have historically inadequate insolvency systems, which are supposed to be the rules covering the orderly liquidation of assets of companies that go under or individuals that lose the capability to pay their debts.

Insolvency rules also aim to balance competing claims of various creditors against a debtor’s assets.

“Weak insolvency systems have been identified as one of the key shortcomings of the Asian markets. The Asian financial crisis of 1997-1998 focused a glaring spotlight on this weakness,” BSP Governor Amando M. Tetangco Jr. said. “Unprecedented expansion fueled speculation that eventually led to a collapse of institutions, compelling   governments to step in—and putting a drag on economies that took years to shake off.”

The Philippines, through the BSP, is playing host this week for the 9th annual Forum on Asian Insolvency Reform (FAIR) being held at the Philippine International Convention Center (PICC).

The forum aims to provide an opportunity for the region’s policymakers to learn best practices from international experts in the field of insolvency.

FAIR is a joint initiative of the World Bank, the United Nations Commission on International Trade Law, and the International Association of Restructuring, Insolvency & Bankruptcy Professionals (INSOL).

Insolvency laws aim to protect the rights of creditors in the event that borrowers default on their loans. This helps in ensuring that the financial system avoids an accumulation of toxic assets, which can lead to the collapse of the banking industry.

Fortunately, Tetangco said, debt levels of local firms and households have not reached unmanageable levels.

“Consumer loans, while they have gone up, continue to be well managed. Past due ratios have been contained,” he told reporters. “And overall, Philippine corporations are really not that leveraged. There may be some but, overall, there has been no overleveraging for Philippines corporations.”

Still, Tetangco said, improving insolvency procedures in the Philippines would be vital in improving the country’s business climate.

He said most insolvency proceedings in the Philippines focus on the liquidation of a company’s assets. Tetangco said the focus should be on detecting possible causes of insolvency before a company goes bankrupt.

For the BSP’s part, Tetangco said its main goal was to keep the local financial system strong to allow it to absorb losses from loan defaults.