Benjamin Diokno, governor of Bangko Sentral ng Pilipinas (BSP), the central bank of the Philippines, hopes that a new law to create ‘bad bank’ asset management companies will reduce non-performing loan (NPL) ratios in the Philippines and stabilize a system shocked by Covid-19.
It is a move with a lot of historical precedent in Asia, but is it necessary?
The Financial Institutions Strategic Transfer (FIST) Act was signed by president Rodrigo Duterte on February 16, and a period of consultation on its implementing rules and regulations concluded on February 25.
It allows for the establishment of FIST corporations – basically, asset management companies commonly known as bad banks – which are authorized to acquire non-performing assets (NPAs) from financial institutions.
This allows the banks to strengthen their balance sheets during a time of financial system stress brought about by the Covid-19 pandemic.
This time, we passed the same law, but stronger in provisions, in the year of the crisis itself
Benjamin Diokno, Bangko Sentral ng Pilipinas
Specifically, BSP says the Act is expected to do three things: save banks from incurring costs on the administration of NPAs; increase liquidity within the banking system that would otherwise be tied up with bad debts; and free up bank capital, allowing banks to tolerate more risk and therefore expand their investment and lending.
There is nothing new in the bad bank idea – many Asian countries launched such measures after the Asian financial crisis in 1998, including the Philippines.
However, one difference this time around is the speed of process.
“We had the same institution, ‘bad bank’, during the Asian financial crisis, but that was passed and legislated about four to five years after the crisis,” Diokno tells Euromoney. “It took them so long to put this in place.
“This time, we passed the same law, but stronger in provisions, in the year of the crisis itself.”
There is, though, a significant other difference between the Asian financial crisis and Covid.
So far, banks in Asia don’t appear to be in anything like the state of disrepair that they were two decades ago. Diokno acknowledges this himself.
“Because of the reforms that we did as a result of the Asian financial crisis, the banking system is very sound,” he says.
Indeed, his deputy Chuchi Fonacier, who is in the arm of the central bank responsible for the regulation of banks in the Philippines, says system-wide bad debts for the Philippine banking system stand at 3.6%, and for the big banks 3.1%.
NPL ratio
Diokno said last week that the NPL ratio for the banking system would likely decline between 0.63 and 0.7 percentage points because of the new law. For context, post-Asian financial crisis, the NPL ratio in the Philippines averaged 20.2% from 1999 to 2002, according to the Asian Development Bank; in Indonesia it was 30.8%.
The Philippines is, like many countries in Asia, gradually easing its way out of loan moratoria, which were applied to ease pressure on borrowers, so it is possible numbers could get worse.
The Philippine banking system is in a position of strength, even after the debt moratorium elapsed
Chuchi Fonacier, Bangko Sentral ng Pilipinas
Fonacier says: “But we are expecting that even after the debt moratorium has lapsed late last year, the banking system will still be able to register low numbers for their NPLs.”
“They increased their allowances for credit losses. There are enough buffers for them, [CET1 ratios are] high, well above our requirement for 10% and the BIS [Bank for International Settlements] requirement of 8%, so [the banking system is] really capable of absorbing any deterioration in asset quality.”
She adds: “We believe that the Philippine banking system is in a position of strength, even after the debt moratorium elapsed.”
Banks in the region seem to be finding that borrowers are more able to keep up with post-moratorium payments than they had expected. Credit costs associated with the crisis appear, so far, to be low.
So, is a new bad-bank deal necessary, or should banks be expected to deal with their own problematic loans?
Arguably, they should, but the BSP’s position isn’t just about being nice to the banks. It is more about what the banks can do for the economy and removing anything that stops them from lending and investing.
Diokno and his team have been fixated with getting the Philippines to an A rating – it is BBB+/Baa2/BBB with positive outlook from S&P/Moody’s/Fitch – and they were well on course before the pandemic hit.
Diokno wants the coronavirus, in the final analysis, to have been a bump in the road rather than a pivotal reversal of fortunes, and to achieve that, he needs the banking sector active and buoyant, and taking moderate risk. Otherwise, the economy won’t grow enough.
Banks in the Philippines can count themselves lucky. They are getting something of a free pass on bad debt without really having to suffer any of the associated pain. Diokno will be hoping his largesse is repaid by the country’s banks driving inclusive growth.
