Draft Law on Special Investment Vehicles for Backed Bad Debt Loans

August 30, 2020 | 00h00

MANILA, Philippines – The Bangko Sentral ng Pilipinas (BSP) and the country’s major banking players are pushing for passage of a bill that will establish special purpose vehicles for distressed loans and assets amid the coronavirus disease 2019 or the COVID-19 pandemic.

BSP chief executive Lyn Javier said the regulator is pushing for swift passage of Senate Bills 1594 and 1596 or Strategic Financial Institution Transfer (FIST) to help banks get rid of bad loans and of assets via special purpose vehicles.

“Prompt enactment of the FIST law, despite strong banking fundamentals, would promote investor and depositor confidence and mitigate the adverse reactions of a financial system in the country,” Javier recently told the Senate Committee on Banks, Institutions financial and currency.

The FIST law encourages financial institutions to sell non-performing assets (NPAs) to asset management companies specializing in resolving troubled assets, through tax incentives.

The law will allow the Department of Finance (DOF) to extend the two- and five-year entitlement periods to qualify for tax exemptions and fee privileges of up to two and five years, respectively.

Other tax incentives include exemption from documentary stamp duty, capital gains tax, withholding tax and value added tax or gross revenue tax, as well as a 50% reduction in registration and transfer fees imposed by the Land Registration Authority, among others. .

“The banking system has built-in buffers. There is, however, a limit to this risk-taking capacity. Putting in place resolution frameworks, such as the FIST law, will ensure that troubled financial institutions have a mechanism to strengthen their balance sheets, ”Javier said.

Javier noted that the NPL (NPL) ratio of Philippine banks swelled to 18.6 percent in 2001, from a range of 3 percent to 3.4 percent in the first half of 1997 during the financial crisis. Asian, but improved to 2.2 percent from 8.6 percent during the global financial crisis in 2008.

Thanks to Republic Law 9182 or the Special Purpose Vehicles Law of 2002, Javier said banks were able to offload NPA worth 146.2 billion pesos, mostly under the form of bad loans.

Javier said the SPV Act helped reduce the NPL ratio of Philippine banks to 2.6% in 2009, from 14.7% at the end of 2002.

A recent survey by the BSP found that the industry’s NPL ratio would almost double to 4.6% by the end of the year, from 2.4% at the end of March due to the impact of the COVID-19 pandemic.

On the other hand, the industry’s capital adequacy ratio (CAR) will drop slightly to 14.8% this year, from 15% at the end of March, well above the 10% threshold set by the BSP.

For his part, the chief executive of the Philippine Bankers Association, Benjamin Castillo, said the group strongly supports the initiative taken by the Senate in pursuing the bill.

“We believe this will prepare the banking system for the expected increase in non-performing assets resulting from the community quarantines we have put in place to contain human damage,” Castillo said.

The economy stagnated and contracted 9% in the first half of the year after Luzon was placed under enhanced community quarantine in mid-March to prevent the spread of COVID-19.

The Development Budget Coordination Committee (DBCC) now expects a larger GDP contraction from 4.4% to 6.6% instead of 2% to 3.4% this year.