It has been nearly a year since the World Health Organization declared the coronavirus outbreak a pandemic. The world is still dealing with the pandemic’s adverse impacts, not just in the public health sphere, but also on the economy.
In 2020, the Philippines suffered its worst economic performance with a Gross Domestic Product contraction of 9.5%, the largest decline since the indicator was first formally compiled in the period following independence. Economists attribute this outcome to the lockdown, which may end only when herd immunity is achieved primarily through mass vaccination.
THE STRUGGLE IN FINANCIAL SERVICES
The pandemic did not just take away the freedom to enjoy the good things in life — it also took away livelihoods and dashed many hopes for a prosperous life. The government deployed resources and handed out cash assistance to help cushion the adverse impacts of the pandemic, but it can only do so much. It needs the help of the private sector, particularly the financial services industry. To their credit, financial institutions (FIs) extended concessions to borrowers and made sizeable donations, apart from keeping many of their employees on payroll.
Nevertheless, many borrowers have been failing to meet their loan obligations, putting immense pressure on an FI’s capital as non-performing loans (NPLs) rise. While some NPLs are secured by property, these are highly illiquid and difficult to sell — especially in an economy riddled with uncertainties and everyone is reluctant to spend.
If left unchecked, the Philippines may plunge deeper into financial crisis. To maintain the integrity and stability of the financial system, it is critical to provide the necessary support to FIs, helping them stay liquid, flexible enough to use their capital, and agile in responding to opportunities and challenges that may arise.
LETTING LIQUIDITY FLOW THROUGH FIST
One of the key legislative agenda items for the government in response to the pandemic was the Financial Institutions Strategic Transfer (FIST) Act, which was signed by President Rodrigo R. Duterte on Feb. 16, going into the books as Republic Act No. 11523. The FIST Act aims to ensure liquidity in the financial system by encouraging private sector investment in non-performing assets (NPAs).
FIST CORPORATION (FISTC)
A central feature of the proposed law is the creation of a special type of corporation called a FIST Corporation. A FISTC may be established by interested investors to acquire non-performing loans and assets of FIs for a consideration.
The law provides that a FISTC cannot be set up as a one-person corporation. Also, if the FISTC acquires land, at least 60% of its outstanding capital needs to be owned by Philippine nationals.
Through FISTCs, illiquid NPAs held by FIs may be converted to cash or liquid assets, thereby re-injecting unutilized funds back into the financial system where they can be utilized for more economically productive and viable pursuits. In addition, taking these NPAs out from the balance sheets of the FIs frees up capital that can be used for more profitable undertakings instead of being tied up in maintaining NPAs and ease the burden of meeting capital adequacy requirements.
These FISTCs will be specifically established to acquire, maintain, and/or develop the NPAs, among other activities. Having a business model focused on such activities ensures that these NPAs do not stay non-performing. Rather, NPAs will be turned into productive assets that yield value and usufruct.
SOURCING FUNDS FROM THE PUBLIC
The funds of FISTCs may come from capitalization and/or the issuance of Investment Unit Instruments (IUIs).
IUIs are a participation certificate, debt instrument, or similar instrument issued by the FISTC and subscribed for by Permitted Investors pursuant to an approved FISTC Plan. FISTCs obtain funds from the public through the issuance of IUIs giving equity participation to Permitted Investors, who may acquire or hold IUIs in a FISTC in the minimum amount of P10 million.
To entice investors to set up FISTCs, certain tax exemptions and fee privileges will be granted for a certain period. The transfer of NPAs from FIs to FISTCs, FISTC to third parties, or dation in payment in favor of an FI or FISTC will be entitled to income tax, value-added tax / gross receipts tax, and documentary stamp tax (DST) exemptions. Transactions are also entitled to reduced regulatory fees for registration, transfer, and filing.
In addition, to encourage the infusion of capital and financial assistance by the FISTC to rehabilitate the borrower’s business, the FISTC, for a period of not more than five years from the acquisition of NPLs, is exempt from income tax on net interest income, DST, and mortgage registration fees on new loans in excess of existing loans extended to borrowers with NPLs which have been acquired by the FISTC. In case of capital infusion by the FISTC to the borrower with NPLs, the FISTC will also be exempt from the DST.
On the part of the FIs, any loss, excluding the accrued interests and penalties component, incurred by them as a result of the transfer of an NPA within two years from the effectivity of the FIST Act will be treated as an ordinary loss. Such loss incurred by the FI may be carried over for a period of five consecutive taxable years immediately following the year of such loss, subject to pertinent laws.
If the law is successfully implemented as envisioned, the additional liquidity will keep the financial system afloat, thereby resolving many economic uncertainties. The Philippine economy may once again be poised for another period of growth. This will stimulate economic activity, creating a ripple effect extending to other industries. Another key to success is to encourage participation from the global market to induce capital flows into the country.
The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only and should not be used as a substitute for specific advice.
Gabriel Eroy is a Manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.
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