News – PH – BSP dangles sweetener on sale of bad loans from banks


MANILA, Philippines – Bangko Sentral ng Pilipinas (BSP) plans to extend temporary regulatory relief measures to persuade banks to offload even acidic loans at significant discounts to maintain a solid and secure financial system amidst the to ensure global health crisis

In a draft memorandum, the central bank stated that the proposed measures would encourage BSP-regulated financial institutions (BSFIs) to stop selling non-performing assets (NPAs) under Republic Act 11523, also known as Strategic Transfer of Financial Institutions , Maximize or FIST Act of 2021

“The guidelines recognize that in addition to tax breaks under the FIST Act, BSFIs may need temporary government relief, particularly with regard to when losses are recorded, so that they can be encouraged to maximize sales of their NPAs even if they are significant Discount, ”said the GNP

Generally, loans become NPAs if they are outstanding for 90 days or more and are not repaid by borrowers.The law applies to assets that went bad on or before December 31, 2022

First, the proposed guidelines would allow banks and financial institutions to write off any excess of the book value of NPAs over proceeds in cash or financial instruments issued by FIST companies or special purpose vehicles (SPVs) This represents an actual loss that should be charged to the operation of the current period

The loss resulting from the sale, excluding accrued interest and penalties, including losses not previously deducted from gross income, could be posted to the deferred cost account, which was to be amortized over a period of five years

Similarly, BSFIs can use an existing specific allowance for credit losses on sold NPAs to cover unrecognized bad debt provisions or apply the excess as additional allowance for potential credit losses on remaining assets

Banks that use the relief measure to defer recording losses on the sale or transfer of NPAs must continue to disclose their actual capital adequacy ratio

In addition, financial instruments obtained through the sale of BSFIs as payment for the sale or transfer of NPAs should be risk weighted according to the applicable risk-based capital adequacy framework and continue to comply with Basel liquidity coverage as well as net liquidity coverage with stable funding ratios

The BSP also finalizes the circular which contains the guidelines for the sale or transfer of NPAs by banks to FIST companies or SPVs

“The implementation of the FIST Act strengthens the primary role of the BSFI in providing financial services and liquidity to support households, businesses and productive economic sectors by enabling the BSFI to dispose of their distressed assets and increase their risk Sustainability, “said the GNP in the draft of the circular

The regulator is also preparing the guidelines for obtaining a Certificate of Eligibility (COE), which will allow banks to use the incentives and privileges for selling or transferring NPAs to a FIST company or individual, and for transactions with these to use dacion en pago by the borrower or by a third party on behalf of a borrower

Under the proposed guidelines, banks are required to submit their letter of intent, master list of NPAs, and secretarial certificate for Board approval of the plan to sell or transfer NPAs to BSP

Based on estimates, the GNP expects the new law to lower the industry’s NPL rate by 0.63 to seven percentage points and would help keep the banking system stable despite the effects of the COVID-19 pandemic

The new law is similar to Republic Act 9182, or the Special Purpose Vehicle Act of 2002, which allowed the establishment and registration of special purpose vehicles to acquire distressed assets and sell them in the markets after the 1997 and 1997 Asian financial crisis, 1998

Latest preliminary data from the central bank showed the industry’s NPL ratio fell to 361 percent in December after accelerating 11 consecutive months to 378 percent in November

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Bangko Sentral ng Pilipinas, Central Bank, Finance

News – PH – BSP dangles sweetener on sale of bad loans from banks