Recovery to trim banks’ bad loans

The anticipated economic recovery should help the local banking industry trim its bad loans or non-performing loans (NPLs), according to the central bank governor.

"Once economic activity picks up, there should be an increase in banking activities that (subsequently) should allow banks to reduce their non-performing loans either through the transfer of assets to the asset management companies (AMC) or the sale of these assets, to new investors," said Bangko Sentral ng Pilipinas (BSP) Governor Rafael Buenaventura.

Buenaventura said that as economic activity grows, banks’ activities will also pick up, and they should start attending to their sour loans.

The government has forecast the economy to grow by four to 4.5 percent this year (2002) and is assuming that the country’s major trading partners currently experiencing a downturn, will begin their economic recovery by next year, possibly in the second semester.

"They should start getting rid of their NPLs which are a drag on their income," Buenaventura said, referring to local banks.

Buenaventura said the banks are waiting for the House of Representatives to consolidate the securitization bills being proposed, including House Bill 2759 entitled An Act to Establish the Legal and Regulatory Framework for Securitization and the Development of Asset-Backed Securities Market authored by Speaker Jose de Venecia.

"The banks expect the De Venecia bill to be passed in the first quarter next year," Buenaventura said.

These bills seek to rationalize the tax, legal and regulatory regime governing asset-backed securities. This is expected to provide government with options of generating revenues while developing an active and liquid market. In particular, it will make home mortgages more affordable and accessible.

Securitization is the process of converting bank loans and other assets into marketable securities for sale to investors. It allows firms or agencies to remove non-performing assets from their balance sheet. It also allows them to make new loans from the proceeds of securities sold to investors.

The securitization bills are being pushed by the Arroyo administration to pave the way for the sale of banks’ estimated P70-billion worth of foreclosed properties to government that will support the low-cost, mass-housing programs of the government.

Banks are being urged to dispose off their NPLs and other assets to the proposed AMCs.

The amount of bad loans of local banks is seen peaking at 21 percent of the total loan portfolio by the third quarter of 2002 from 18.8 percent as of end-October this year, a study by the Citigroup investment house Salomon Smith Barney said.

The study noted that despite the sluggish economy, banks’ loan portfolio will grow by four percent in 2002, which is better than this year’s almost zero growth.

Earlier, Buenaventura said foreign financial group Lehman Brothers committed to invest $1 billion in the country by buying some of the sour loans of locally operating banks once the law that gives incentives to AMCs is passed.

Lehman’s proposal is similar to the previous offer of another US-based company, Cerberus Plc., to put up a $500-milion funds to acquire and resell foreclosed properties of government housing institutions, particularly, the National Home Mortgage Finance Corp. (NHMFC), the National Housing Authority and the Pag-IBIG Fund.