ADB urges government to allow banks to form AMC

The Asian Development Bank (ADB) wants the national government to stay clear of the banking sector’s attempt to form an asset management committee (AMCs) to rid the system of bad debts.

In an interview, ADB director of the Philippine office Dr. Gunther Hecker said government involvement calling it a "morale hazard."

"It is a problem of morale hazard if the government is allowed to enter into the picture. It would be a more welcome development for the private sector to be on top of this situation," Hecker pointed out.

It was a position taken by the World Bank, which volunteered its expertise in dealing with the alarming size of non-performing loans (NPLs) of the country’s banking sector.

The ADB director openly called for a purely private sector initiative in dealing with the NPLs, which have unofficially ballooned to nearly 20 percent. It is considered among the highest if not the highest in the Asia Pacific region.

The ADB director did not specify the method by which the private sector would form AMCs. Rather, Hecker said that it would depend largely on how the banking sector and the experts see it most fit.

However, he recommends that it would be advantageous for the various banks with high NPLs to band together. That would allow for greater expertise and larger funds to deal with the banking sector’s almost 19 percent NPL ratio based on official figures. "There may be better opportunities (in larger formations) rather than through individual banks."

An AMC is designed to rejuvenating banks with high levels of bad debts and assets. Under the scheme, it will acquire bad loans at various discount rates.

Hecker said that the Bank has volunteered to assist the Philippine banking industry.

"The ADB is prepared to discuss with monetary officials and representatives of the banking sector to see how we can help. I understand that the World Bank has also given its commitment to help the Philippine government," Hecker said.

Bad debts were registered at an average of 15.1 percent in 2000 rising to 18.0 percent at the end of the third quarter this year. It increased to 18.81 percent last October.

Hecker pointed out that the NPLs have unabatedly increased while no additional "points" or relief were in sight. "The denominator is getting while the bad loan units remain high thus the ratio is getting high. I think it is timely to talk about AMCs."

While admitting that the ADB did not have direct experience in handling or forming AMCs it have a private sector window or group that had been closely monitoring and analyzing formation and operations of AMCs in others Asian countries.

"We do not have direct experience but we have been carefully observing and analyzing what is happening in other countries, but it is a new field. We will help out with qualified experts or we will find experts to help us out," the ADB director swore.

Earlier, the World Bank formally expressed preparedness to assist the banking sector in coping with the alarming rate of NPLs and the possible formation of AMCs. And it likewise expressed favor towards the non-involvement of government in the formation or guidance of the AMCs.

The Department of Finance (DOF) likewise tasked Congress to exempt from the six-percent capital gains tax the sale of foreclosed properties held by the banks.

The combined foreclosed properties are estimated to be worth P40 billion. However, banks have said that disposing of these properties have been uneconomical due to the taxes involved, which they have to shoulder.

The finance department wants government to exempt all transactions or the disposal of these properties with government securities (GS) or bonds with maturity period of at least five years.

In turn, the banks would sell the bonds or securities to the market under the condition that all proceeds from the sale would be used exclusively for the low- and medium-cost housing projects. The housing program is part of the Arroyo administration’s fight against poverty.

The proposal originated from the Bankers Association of the Philippines (BAP) which has been initiating moves to rid the industry of its NPAs and NPLs. Among these initiatives are the formation or the hiring of AMCs.

The formation of bad debt councils allow the entire bank infrastructure to concentrate on operating the bank and its expansion programs without having to burdened with the bad debts or real and other properties owned or acquired (ROPOA).

The formation of bad debts councils allow the entire banks infrastructures to concentrate on operating the bank and its expansions programs without having to burdened with the bad debts or real and other properties owned or acquired (ROPOA).

However, investment banker ING Baring disapproves of the formation of AMCs savings that it is counter-productive and that it would prejudice banks with good asset quality.

It added that the AMC is a moral hazard that could protect banks that have undertaken unsound banking practices.

Though the AMC would favor banks with high NPL levels specially those with relatively low levels of loan loss provisioning, Baring said the scheme would indirectly penalize those with good asset quality.