BSP considers proposal to boost banks’ capital

The Bangko Sentral ng Pilipinas (BSP) is considering a proposal that would free up from between P1.5 billion and P5 billion worth of deferred income tax payments to boost the capital to risk ratio of banks.

According to the BSP, banks have requested to be allowed to boost their capital by rolling over the deferred income taxes on loan loss provisions for bad loans.

BSP Deputy Governor Alberto Reyes said the proposal was made by the Bankers Association of the Philippines (BAP).

"When banks set aside provisions for loan losses, they also set aside 32 percent for deferred income tax on the provisioning," Reyes said, adding that the "tax effectively accumulates as the bank books more loan loss provisions for bad loans."

"There is a net loss carryover if they are profitable," Reyes explained. "As they book more loan loss provisioning, the amount of deferred income tax builds up," he said.

When the non-performing loan (NPL) is removed from the portfolio, Reyes said it is possible to allow banks to put the corresponding deferred income tax into the capital as a way of boosting its capital base.

"This is a big amount," Reyes said. "It could vary from P1.5 billion to as much as P5 billion for the top 10 banks alone."

If the Monetary Board approves the BAP request, Reyes said the move would significantly improve the capital to risk ratio of banks as they write off, reactivate or restructure more bad loans.

"If ever, we are going to let banks do this only if they are profitable," Reyes said.

He said it would encourage banks to restructure more bad loans to further improve the industry’s NPL ratio which improved slightly to 15.08 percent in February from 15.12 percent a month ago.