By Luz Wendy T. Noble, Reporter
MONETARY AUTHORITIES have repeatedly said the banking industry still has sufficient resources and buffers, but amid the rising soured loans, it still pays to have a safety net for banks should they be overburdened with these nonperforming assets (NPAs).
Enter the Financial Institutions Strategic Transfer (FIST) Law.
Signed in February, the FIST Law (Republic Act 11523) opens doors for credit-granting institutions to clean their balance sheets by selling their NPAs to asset management companies called FIST corporations (FISTCs) that are registered with the Securities and Exchange Commission (SEC).
Assets that will be recognized as nonperforming until Dec. 31, 2022 will be eligible to be sold under the law to FISTCs.
Before selling their determined NPAs, however, financial institutions need to secure a certificate of eligibility (COE) from the Bangko Sentral ng Pilipinas (BSP) as a documentary approval that their determined assets can be sold to FISTCs. This will also allow them to avail of tax incentives and fee privileges of the transaction.
The BSP approved the implementing rules and regulations (IRR) of the law on May 20, including the procedure for getting the certificate of eligibility for targeted NPAs that banks want to dispose of. As of this writing, the BSP is not yet accepting applications of COEs, said BSP Deputy Governor Chuchi G. Fonacier.
“Once the circular and the memorandum to all BSP-supervised financial institutions are signed and issued, the BSP will start accepting requests on the sale of nonperforming loans (NPLs) and real and other properties acquired (ROPA), collectively known as NPAs,” Ms. Fonacier said in a Viber message.
Circular No. 1117 Series of 2021 signed by Governor Benjamin E. Diokno on May 27 formally opened the opportunity for financial institutions to seek regulatory approval for offloading NPAs through applying for COEs. The circular also requires the need for BSP-supervised financial institutions to give prior notice to borrowers before selling their loans and the prudential reporting for tax and fee privileges availed from transactions.
The central bank took on the learnings from the Special Purpose Vehicle (SPV) Act of 2002, which was the equivalent measure of the FIST Law that addressed the bad loan pile up caused by the Asian Financial Crisis. For one, the turnaround time for the issuance of the COE has been reduced to 20 days from the receipt of the application, much shorter than the 45-day allowance in the SPV, Ms. Fonacier said.
Lending has been in decline since December. In April, outstanding loans by big banks dropped by 4.5%. Central bank officials have attributed the credit slump partly to tighter credit standards by banks to shield against the rise in bad loans.
The industry-wide NPL ratio stood at 4.21% as of end-March, higher than the 2.25% a year earlier. This, as bad loans surged 80% to P448.593 billion in March.
Against this backdrop, the FIST Law is seen to help soothe banks’ worries on NPL buildup, which is still relatively comfortable compared to the peak of 17.6% in 2002 in the aftermath of the Asian Financial Crisis based on BSP data.
The BSP expects the law to help reduce the banking system’s NPL ratio by about 0.63 to 0.73 percentage point as lenders are expected to dispose of at least P152 billion in NPAs.
“[FIST is] just a fallback position. But we don’t see any situation worsening at this time. Even without [it], the banking industry can handle the current crisis,” BSP Governor Benjamin E. Diokno has said in a BusinessWorld One on One.
According to the IRR released on March 29 by the SEC together with the Department of Finance, the BSP, the Bureau of Internal Revenue, and the Land Registration Authority, FISTCs shall be organized as a stock corporation and should be more than a one-person corporation with the primary purpose of investing in or acquiring NPAs of financial institutions.
For a firm to qualify as a FISTC, it must have an authorized capital stock of at least P500 million, with a minimum subscribed capital stock of P125 million and minimum paid-up capital of P31.25 million. If the FISTC will acquire land or that there is foreign equity participation, at least 60% of its outstanding capital shall be owned by Philippine nationals in accordance with the provisions of the Constitution.
Moreover, any qualified or permitted investor may acquire or hold “investment unit instruments” (IUIs) in the corporation with a minimum amount of P10 million. Permitted investors are those considered qualified under the Securities Regulation Code such as banks, insurance firms, registered investment houses, and pension funds or retirement funds maintained by a government agency or a private corporation and managed by an entity authorized by the BSP or SEC, among others.
FISTCs are prohibited to acquire the IUIs of another FISTC. Moreover, the parent, subsidiaries, affiliates or stockholders, directors, officers or any related interest are not allowed to acquire or hold, directly or indirectly, the IUIs of the FISTC that acquired the NPAs of the financial institution.
Applications for the establishment and registration of a FISTC must be filed with the SEC within 36 months from the effectivity of the FIST Law. Firms that were able to register within the two years from the law’s effectivity are granted incentives such as tax exemptions from the documentary stamp tax, capital gains tax imposed on the transfer of land and other capital assets, creditable withholding income taxes on the transfer of land and buildings treated as ordinary assets, and value-added tax on the transfer of NPAs or gross receipts tax, whichever is applicable.
Moreover, eligible FISTCs are also entitled to a 50% discount on applicable mortgage registration and transfer fees of real estate mortgage and chattel mortgage registrations to and from the FISTC, as well as on filing fees for foreclosure initiated by the FISTC in relation to any NPA acquired from a financial institution, and on land registration fees.
FISTCs established on the 25th to the 36th month from the FIST law’s effectivity could not avail of the tax incentives “unless an amendatory law extending the privileges to said FISTCs is passed.”
ARE BANKS INTERESTED?
Financial data on universal and commercial banks compiled by BusinessWorld as of the first quarter on a solo basis (head office plus branches) showed the gross NPL ratio averaging 4.12% as of end-March 2021, coming from 3.68% in the previous quarter and 1.93% in the comparative period last year.
While the formal application for COEs have yet to kick off as of writing, BusinessWorld asked commercial and government banks on whether they are keen to clean their balance sheet through the FIST Law.
Among those interested is Ayala-led Bank of the Philippine Islands (BPI). BPI Chief Financial Officer Maria Theresa Marcial-Javier said they have already been in touch with parties interested to create a FISTC.
“BPI is keen on selling its NPAs via FIST. For the banking industry, we see the FIST Law, with its tax benefits, as an enabler to sell our non-earning assets and free up capital for lending and other growth opportunities,” Ms. Marcial said in an e-mail.
In particular, she said the bank is looking to sell a mix of corporate, SME (small and medium-sized enterprises).
Philippine National Bank (PNB) has also expressed earlier on that they are looking to tap the provisions of the FIST Law. Pressed for updates, the Tan-led lender said they are in the process of identifying eligible NPLs and NPAs that can be transferred to a FISTC.
“We are reviewing the portfolio size and establishing processes to ensure an organized and smooth transfer of identified accounts to [FISTC]. We are considering offloading consumer and business loans which are not susceptible to the normal collection process and those that will take too much time to collect,” PNB said in an e-mailed statement.
Yuchengco-led Rizal Commercial Banking Corp. (RCBC) is likewise not closing its doors and is in the process of looking into the law and its implementing rules and regulation. At the same time, the bank is reviewing its portfolio.
“Yes, RCBC is looking at the FIST Law as an option to unload its NPAs. The FIST Law will help the overall recovery and collection process, given the bank’s limited resources,” the bank said in an e-mailed statement.
“The bank’s asset quality is still weighed down by the effects of the quarantine restrictions due to the COVID pandemic but is managed through its collection and recovery programs including a COVID-19 assistance program,” RCBC said.
On the other hand, there are banks that have hinted at not touching the provisions of the FIST Law. Take the case of BDO Unibank, Inc. the country’s largest bank by asset, which stressed
“We are not keen on selling our NPLs to FIST [corporations], as we have kept the level of our NPLs at manageable levels. Our balance sheet remains solid with more than sufficient provisions and a strong capital base,” BDO said in an e-mail to BusinessWorld.
UnionBank of the Philippines, Inc. welcomes the measure as an option for banks in a worst case scenario, but appears to not be keen to avail of its provisions.
“So far, no interest on selling NPAs because our NPAs are manageable and mostly houses/condominiums. NPLs have gone up, but mostly in mortgages and these will be restructured,” Jose Emmanuel U. Hilado, UnionBank senior executive vice-president and chief financial officer, said in an e-mail.
Likewise, East West Banking Corp. (EastWest Bank) President and Chief Executive Officer Antonio C. Moncupa, Jr. said the Bank does not see the need to offload soured assets through FIST.
“My view is that the banking industry remains resilient and that it does not have that urgency [to offload bad assets as was seen] in 1997. Personally, for EastWest, I’m not very keen on it,” Mr. Moncupa said on a May 4 TV interview with ANC.
Meanwhile, the state-owned Development Bank of the Philippines (DBP) is still gauging the impact of tapping FIST to manage their NPAs.
“The bank is still in the process of conducting a study to determine if transferring the bank’s NPAs to a FISTC is beneficial to the bank rather than managing/disposing it outside the FIST,” DBP President and Chief Executive Officer Emmanuel G. Herbosa said in an e-mail.
Asia United Bank, for its part, recognizes the FIST law’s intention to become another lifeline for banks to manage nonperforming loans as they pile up, but has yet to decide whether they will be tapping on the measure’s provisions.
“We have taken a look at the program discussed its benefits. However, we do not, at this time,have a list of loans that may be sold as we have not looked atspecific accounts. Also, we have to secure board approval to allow us to get into the program,” AUB President Manuel A. Gomez said in an e-mail.
The central bank expects the NPL ratio to hover a little over 5% by the end of this year. S&P Global Ratings analyst Nikita Anand said FIST, in a way, will bode well for banks as it is an assurance that they have a tool to use so that resources are not spent on recovering stressed loans.
“Success in bringing down sector-level stressed loans materially will depend on good execution as well as local banks’ willingness to offload assets, instead of employing their own resolutions and recovery mechanisms,” Ms. Anand said.
With the sector still armed with ample buffers, banks may find the FIST Law to be not so urgent given the economy remains in recession, said Michael Langham, Senior Asia Country Risk Analyst at Fitch Solutions.
“Banks may be reluctant to divest NPLs while the economy is still struggling with the pandemic and asset prices remain depressed,” Mr. Langham said.