The central bank will provide the local banking system with the support it needs to insulate itself from a buildup of bad loans that may result from the ongoing coronavirus pandemic.
This will be done through the Financial Institutions Strategic Transfer (FIST) Act now being proposed to Congress.
At the same time, however, Bangko Sentral ng Pilipinas (BSP) Governor Benjamin Diokno said that Philippine lenders were now better prepared for loan defaults compared to the aftermath of the 1997 East Asian financial crisis, which necessitated an earlier version of the measure called the Special Purpose Asset Vehicle law.
“We did some stress tests on the banking system, and we saw that bad loans could hit 5 percent [of total loans], but our fundamentals are better now,” he said during an online briefing on Thursday afternoon, although he stressed that regulators had yet to quantify the total impact of the crisis on bank loans.
“But for sure, we are better prepared this time than in 1997,” Diokno said.
To further enable the financial system to mobilize savings and investments for the country’s recovery post-COVID-19 pandemic, the BSP chief said the institution was supporting the passage of this measure. It will allow banks to transfer distressed assets like bad loans to a separate corporate entity. Doing so will clean up a bank’s books and give it the headroom to underwrite new loans necessary to keep the economy running.
According to Diokno, the enactment of the FIST law “will not only complement our regulatory and supervisory initiatives to mitigate the adverse effect of the COVID-19 pandemic but is also a necessary measure to assist the domestic financial system in the aftermath of this health crisis.”
The FIST law seeks to encourage financial institutions to sell their nonperforming assets to asset management companies to be created as so-called financial institutions strategic transfer corporations that specialize in the resolution of distressed assets by providing fiscal incentives. These include tax exemptions and reduced registration and transfer fees on certain transactions.
As of March 2020, the banks’ nonperforming loan ratio stood low at 2.2 percent, slightly higher than the 2.1 percent recorded last year.
The nonperforming loan ratio is a lagging indicator of banking system performance. A high bad loan ratio indicates weakness in the financial system and poor state of the economy.
The passage of the law will promote investor and depositor confidence and will result in the efficient conduct of financial intermediation, the central bank said.