Duterte signs law on vehicles for bad loans so banks can lend

The Financial Institutions Strategic Transfer (FIST) is now a law under Republic Act 11523, under which banks currently saddled with unpaid debts will be allowed to offload them on designated firms to be tasked on disposing them off.  A copy of the law was released by Malacañang on Tuesday.
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MANILA, Philippines (UPDATE 7:26 a.m., Feb. 17) — An administration-backed stimulus measure was finally signed into law on Tuesday, following a month of getting held up in Congress by the holidays and a week with President Rodrigo Duterte’s office.

The Financial Institutions Strategic Transfer (FIST) is now a law under Republic Act 11523, under which banks currently saddled with unpaid debts will be allowed to offload them on designated firms to be tasked on disposing them off. A copy of the law was released by Malacañang on Tuesday.

FIST was a priority legislation that allowed the Senate to quickly pass it on second and third readings on the same day late last year. But the bill’s ratification did not come until the last full day of session on December 18, leaving the measure stuck for printing as well as final checking in the chamber before getting transmitted to the Office of the President.

The bill only reached Duterte's desk on the last week of January, Senate President Vicente Sotto III had said in a text message.

All is well that ends well, however, and now the task of implementing the law falls heavily again with the Bangko Sentral ng Pilipinas (BSP), which was already burdened by trying to uplift the economy through rate cuts while the Duterte administration remained reluctant to unleash a much-warranted fiscal stimulus.

Instead, economic officials have touted FIST, among others, as a compelling fix. With FIST enacted, the government is just waiting for two more legislations to pass, one being the Corporate Recovery and Tax Incentives for Enterprises (CREATE) bill that is also just awaiting Duterte’s signature. The GFI Unified Initiatives to Distressed Enterprises or GUIDE, meanwhile, is still far on the legislative mill having just been approved by the Lower House last week.

Getting GUIDE and CREATE enacted will still be necessary for the economy to get back on track, at least in the eyes of Acting Socioeconomic Planning Secretary Karl Kendrick Chua who sees the three bills, together with the 2021 budget, as a “package.”

Chua did admit however that given the delays in getting the measures passed, their impact on economic output is likely to be subdued in the first quarter when the economy is due for its first performance assessment.

Nonetheless, FIST’s passage alone is good news for the central bank trying to push P2 trillion in liquidity out of the banks and toward businesses and consumers they should be assisting through lending. Bank loans contracted for the first time in 14 years in December, and for BSP Deputy Governor Chuchi Fonacier, FIST is the answer they are looking for to encourage lenders to do their job. 

Essentially, lenders are hesitant to lend out because as it is, they are already swamped with unpaid debts from borrowers losing their jobs to the pandemic. Moratorium on debt payments imposed by two “Bayanihan” laws last year only delayed that pain and with those expiring in December, the scale of non-performing loans is showing, and with that the capital banks had to set aside to cover losses.

The hope is that FIST would help the likes of Rena Alessa Nicerio's mom get loans faster. Hoping to secure fresh capital for their handicraft manufacturing business in Bicol, Nicerio's mom filed a business loan from a local lender last week. Typically loans only take up to 14 days to process, but 7 days in and Nicerio said there is no indication their loan would be approved anytime soon. 

"It's difficult if we are talking about big loans. For small loans for us which is an MSME (micro, small and medium enterprise), filing a loan worth P50,000 is easier. But beyond that, processing is slow or even ends up getting disapproved," Nicerio said in an online exchange.

That’s why FIST comes at a right time, but enforcing it would prove to be the next hurdle. Under the law, FIST corporations would be established by financial institutions, including banks and insurers. This requires company registration with the Securities and Exchange Commission (SEC), certification of tax incentive from the tax bureau, as well as meeting stringent capitalization requirements from the BSP, among others. 

While the absence of implementing rules does not prevent the law from being enforced, BSP said rules were already drafted and already with the SEC for inputs. The Philippines did have an experience on special purpose vehicles that absorb bank debts during the 1997 Asian financial crisis, which served as template for FIST, so navigating through the new law should be a little easier.

“The new law will help keep the banking system stable despite the effects of the COVID-19 pandemic... FIST is expected to reduce the NPL ratio by about 0.63% to 7 percentage points,” BSP Governor Benjamin Diokno said in a Viber message late Tuesday.

While easing in December, bad debts remained elevated at 3.61% of total loan books as of end-2020, BSP data showed.

But the main point really is to remove that burden on the banks in the hopes that would prompt them to extend more credit to an economy that shrank 9.5% year-on-year in 2020, and looking to rebound to 6.5-7.5% growth this year. For the government and BSP, FIST is a first step toward that goal.

 

Editor's note: Added Governor Diokno's comments.

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