WHILE offloading bad loans to asset management companies will help banks, doing so comes with a price financial institutions should be willing to pay.
The Financial Institution Strategic Transfer (FIST) measure, which was signed into law last month, can free up liquidity in banks by allowing them to sell their nonperforming assets (NPAs) to FIST companies. But economists interviewed by the BusinessMirror explained that selling price of NPAs is usually at a discount, which means banks will likely incur loss in the process.
“I think these are losses that all economic players have to face, especially if the said NPAs are said to be less superior,” UnionBank Chief Economist Ruben Carlo O. Asuncion told this newspaper. NPAs refer to nonperforming loans (NPL) and real and other properties acquired in settlement of loans.
He explained that valuations of NPAs to be sold may vary, too, but the end goal is the same: offloading NPAs will allow banks to secure immediate funding to extend more borrowings, which are needed to help the economy recover.
ING Bank Manila Economist Nicholas Antonio T. Mapa agreed that the NPA selling price varies as this depends on the agreement between the banks and FIST companies.
However, in order to entice asset management companies, he said that “significant” discounts should be provided for them given that they will take on the bad loans and assets.
While NPAs are sold at a discount—which is consistent with international practices—RCBC Chief Economist Michael L. Ricafort said that the banks doing so will be given tax perks in return.
“In order to convince the financial institutions to accept what will likely be substantial discounts, government is willing to forego taxes collected, such as documentary stamp taxes and capital gains taxes, just to get the sale going,” Mapa said.
Healthy capitalization
Ricafort said that the banking sector can still withstand the impact of the potential surge in bad loans this year, citing its robust capitalization.
In addition, the RCBC economist thinks financial institutions are prepared to handle the anticipated credit risks. “This [healthy capital level] has also been helped by the adoption of risk management frameworks/systems, including better management of credit risks, aligned with global best practices,” he explained.
Capital adequacy ratio of the banking industry stood at 12.71 percent as of January, according to data from the Bangko Sentral ng Pilipinas.
For Asuncion, meanwhile, the worst is over for the financial sector, but warned that the potential rise of bad loans is still around the corner.
“This year, I believe that the worst for the financial sector is already in the rearview mirror,” he said. “At this point, banks can still carry on and continue into the economic recovery this year despite all the challenges.”
Based on data from the Central Bank, NPLs reached P391.67 billion as of end-December 2020, which is 74.77 percent more than P224.11 billion year-on-year. This, as the total loan portfolio slipped by 1 percent to P10.86 trillion by the end of last year from P10.97 trillion in 2019.
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