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FIST law to bring down banks’ bad loan ratio

President Rodrigo R. Duterte on Tuesday signed the law allowing financial institutions to offload bad loans through asset management companies.

By Luz Wendy T. Noble and Beatrice M. Laforga, Reporters

THE BANKING industry’s nonperforming loan (NPL) ratio is expected to be reduced, with the implementation of the Financial Institution Strategic Transfer (FIST) law, Bangko Sentral ng Pilipinas Governor Benjamin E. Diokno said.

“It will ease the NPL ratios of banks moving forward. FIST is expected to reduce the NPL ratio by about 0.63 to 7.0 percentage points,” Mr. Diokno told reporters in a Viber message on Tuesday night.

The banking industry’s NPL ratio stood at 3.61% as of end-December, much higher than the 2.08% a year earlier but still better than BSP’s 4.6% projection for end-2020.

Republic Act No. 11523, or the FIST Act, was signed into law by President Rodrigo R. Duterte on Tuesday. The law allows banks to clean up their books by selling their soured loans to so-called Financial Institutions Strategic Transfer Corporations (FISTCs).

Mr. Diokno said the draft for the implementing rules and regulations (IRR) has been circulated among industry players for comments. The Securities and Exchange Commission is the lead implementing agency.

At the same time, the Finance department is preparing the guidelines on tax exemptions for the covered financial institutions under the new law.

Under the law, the Department of Finance (DoF) and the Bureau of Internal Revenue (BIR) should issue revenue regulations implementing the fiscal incentives within 30 days after its effectivity.

Meron na (IRR), ongoing review na BIR-DoF,” said Marissa O. Cabreros, a deputy commissioner at the bureau, in a text message on Wednesday.

The FIST law covers assets of financial institutions that will be deemed as nonperforming until Dec. 31, 2022. It exempts the transfer of nonperforming assets from the banks to a FISTC, and FISTC to third-party buyers or borrowers, from the payment of documentary stamp tax, capital gains tax, creditable withholding income taxes and value-added tax (VAT).

The transfers will also be subjected to lower fees. The registration, land registration and transfer fees of the Land Registration Authority (LRA), as well as the filing fees for foreclosures by the FISTC, have been slashed to 50% for two to five years.

Aside from the tax perks on transfers, the law also provides tax exemptions for FISTC to encourage capital infusion and financial aid to the firm, such as exemption from paying income tax on net interest income, documentary stamp tax, and mortgage registration fees on new loans, for up to five years.

The DoF earlier estimated the FIST, which forms part of the government’s recovery package, will result in a “manageable” P2.9 billion to P11.6 billion in foregone revenue in the next five years due to the tax exemptions.

“Remember that this law is a repeat of the 2002 Special Purpose Vehicle Act and industry people know that the said law was helpful and achieved what it was meant for, and this time around, we are hoping that it will again be successful,” UnionBank of the Philippines, Inc. Chief Economist Ruben Carlo O. Asuncion said in a Viber message.

Banks have become conservative in extending credit due to the risks associated with the crisis. BSP data showed lending fell by 0.7% in December, the first in over 14 years after months of tepid growth.

Fintech Chairman Angelito “Lito” M. Villanueva said the law will have a “ripple effect” that will benefit small businesses.

“Given that banks will improve liquidity due to this law, more fintech players, which are by themselves MSEs (micro and small enterprises), can re-lend to their clientele as well,” Mr. Villanueva said in a text message.

Meanwhile, ING Bank N.V. Manila Senior Economist Nicholas Antonio T. Mapa said that while the law is “a step in the right direction” to help bring down the NPL ratio, it is not the sole solution to the bank lending crisis that is rooted in both the weak demand from borrowers and the risk-off attitude of banks on credit extension during the crisis.

“With incomes threatened, would-be borrowers are likely in cash conservation mode with a good majority possibly opting to put off investment decisions until the economy improves,” he said.

“Meanwhile, despite aggressive rate cuts by the BSP designed to bolster lending activity, banks have largely been unable to pass on these lower borrowing costs as they tack on additional premium due to elevated levels of risks given the recessionary environment,” he added.

Financial Executives Institute of the Philippines (FINEX) said in a statement on Wednesday that the law will help maintain a healthy financial sector while many businesses struggle to settle their debts amid a pandemic-induced recession.

“The new law eliminates barriers that prevented its predecessor law from fully achieving its objectives. Hopefully, it will encourage the banking sector to continue lending to the private sector and thereby achieve its objective to rehabilitate distressed business and make them meaningful contributors to our economic recovery,” FINEX said.

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