Recent Posts

Breaking News

Banks’ bad assets may crumble faster sans FIST

Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno warned senators that banks’ soured assets will grow worse with delays in the passage of the proposed Financial Institutions Strategic Transfer Act (FIST) which would help banks avoid liquidity issues brought on by the pandemic.

 “The impact of the pandemic is significant,” said Diokno at the senate hearing on the FIST bill on Wednesday. He stressed that the “early enactment would prevent steady deterioration in the asset quality of the banking system”.

 Based on a BSP survey of banks, with an increasing volume of non-performing assets (NPAs), the industry consolidated capital adequacy ratio (CAR) which measures banks’ capital health, will decline by end-2020.

 “Deterioration in asset quality is projected to reduce banks’ consolidated CAR to 14.8 percent by end-December 2020 from 15 percent as of end-March 2020,” said Diokno.

 Last August, he also revealed that the same survey indicated that non-performing loans (NPL) ratio will double its number from March to December this year, or from 2.4 percent (end-March) to 4.6 percent by end-2020. This is as “borrowers’ capacity to pay may be weakened by disruption in their cash flows,” he told senators.

 Diokno said these are COVID-19’s impact on banks’ operations and the “lack of urgency to enact the bill” will further crumble both NPAs and NPL ratio.

Diokno reminded senators of the 1997 Asian Financial Crisis which he said have important lessons for the country. At the time, CAR was also above the minimum international standard of eight percent and its NPL ratio was a low of four percent.

 “Since the NPL ratio of the banking system built up over time, there did not seem any immediate need for banking sector intervention. This delay contributed to the steady deterioration in the asset quality of the banking system, with the NPL ratio of the banking system peaking in June 2002 at 18.6 percent in 2001. The NPL of Philippine banks also markedly deteriorated compared to that of other banks in jurisdictions which aggressively implemented government intervention programs to shore up confidence in the banking system,” said Diokno.

 He added that the NPA/NPL ratio “is also a lagging indicator of banking system performance.” 

“Thus, a high NPA/NPL ratio would already point to severe weakness in the financial system and poor state of the economy. High NPA ratios also adversely affect investor and depositor confidence, ultimately hampering the efficient conduct of financial intermediation. Moreover, empirical studies show that an increase in NPLs leads to a reduction in credit supply, rise in unemployment and slowdown in overall economic activity in emerging economies,” he said.

In the meantime, Diokno in his opening statement before the Senate Committee on Banks, Financial Institutions, and Currencies said the BSP fully supports the FIST bill in its objectives of helping banks in their bad debt resolution and NPA management.

 “BSP supports the laudable objectives of FIST Bill to induce economic activity and improve the liquidity of the financial system, enabling FIs (financial institutions) to respond to the looming increase in NPAs, and therefore, propel economic growth. The enactment of the FIST Law will assist the financial system perform its role of efficiently mobilizing savings and investments for the country’s economic recovery as well as its sustained growth and development,” said Diokno.

But while the BSP has prepared the banking system which he assured has built-in buffers to “internalize losses on their exposures” and enabling banks to continue operations as lender and investors even amid the pandemic, he stressed – “there is, however, a limit to this risk-bearing capacity of FIs; thus, the establishment of resolution frameworks, such as the FIST Law, will ensure that distressed FIs have a mechanism to strengthen their balance sheet.”

Diokno said the FIST Law will encourage the sale of NPAs and ensure the following: banks will not have to incur costs related to the management and administration of NPAs, activities that are best left to asset management companies; liquidity within the banking system will increase since this will no longer be tied up in NPAs; and bank capital will be freed-up, thereby increasing the system’s risk-bearing capacity and ability to expand investment and lending activities.


Source: Manila Bulletin (https://mb.com.ph/2020/09/03/banks-bad-assets-may-crumble-faster-sans-fist/?utm_source=rss&utm_medium=rss&utm_campaign=banks-bad-assets-may-crumble-faster-sans-fist)

No comments