Quick lending upturn unlikely

THE FINANCIAL Institutions Strategic Transfer (FIST) Law will not be enough for a “turnaround” in credit growth even as it aims to help banks offload non-performing assets (NPAs), ANZ Research said in a note.

“It (FIST Law) is unlikely to trigger a credit cycle until the risk profile of borrowers improves, a development that is contingent upon a broad-based upturn in the business cycle,” ANZ Research Chief Economist Sanjay Mathur said in a note sent on Thursday.

Republic Act No. 11532 signed by President Rodrigo R. Duterte last week allows banks to get rid of soured loans and NPAs by selling them to Financial Institutions Strategic Transfer Corporations (FISTCs).

Analysts have said the law could help ease banks’ worries about an increase in bad loans and eventually encourage them to lend.

Bangko Sentral ng Pilipinas Governor Benjamin E. Diokno has said the law could bring down the country’s nonperforming loan (NPL) ratio by 0.53 to 7 percentage points. Loans and NPAs that will be deemed as nonperforming until Dec. 31, 2022 will be covered by the law.

Soured loans held by banks surged 78.8% year on year as of December to P391.657 billion, resulting to an NPL ratio of 3.61%. The country’s bad loan ratio peaked at 17.6% in 2002 in the aftermath of the Asian Financial Crisis.

Mr. Mathur said a “period of deleveraging” or reducing debt could be necessary before banks are ready to take on risks from new loans. 

“After a robust credit cycle from 2016 to early 2019, the corporate sector has become quite leveraged… Corporate leverage is already treading at a multi-year high and therefore, adding more debt would be risky,” he said.

Outstanding loans by big banks declined for the first time in 14 years by 0.7% in December.  This followed months of already tepid growth, with November data showing credit expansion at a mere 0.5% year on year as banks were cautious amid the crisis despite about $2 trillion in liquidity infused by relief measures from the central bank as well as the reduction of benchmark interest rates to record lows.

Mr. Mathur also noted the uncertain economic environment, with the household sector hit by high unemployment, weak remittances, and falling savings.

The real estate sector was likewise severely hit by the pandemic, which also affected the lending landscape as the sector accounts for a third of outstanding credit, he said. These contributed to the tighter credit standards imposed by banks.

“Against such a backdrop, we are of the view that a revival in the credit cycle in the Philippines is a distant prospect, even with the implementation of the FIST law. The economic situation also sheds light on why measures to enhance lending particularly to MSMEs (micro, small, and medium enterprises) have had little success so far,” Mr. Mathur said.  

“Our observation from other economies like India is that transferring NPAs is a time consuming process and is periodically set back by operational issues such as the extent of discount offered on NPAs,” he added.

Meanwhile, the Financial Executives Institute of the Philippines (FINEX) said measures such as the Government Financial Institutions Unified Initiatives to Distressed Enterprises for Economic Recovery (GUIDE) Bill would incentivize lending and investment activities to complement the FIST Law.

FINEX President Francisco E. Lim said in a statement that the GUIDE bill will address the supply side of the economy by strengthening financial institutions, which could support the objectives of the FIST Law.

“Its immediate passage will also optimize the benefits of the CREATE (Corporate Recovery and Tax Incentives for Enterprises) and FIST Acts and will also help balance the risks to inflation as the government pushes its efforts to pump-prime the economy, restore normalcy in the country’s business sector, reduce unemployment and provide renewed impetus towards robust economic growth,” Mr. Lim said.

The proposed measure will boost the loan programs of government financial institutions such as the Land Bank of the Philippines and the Development Bank of the Philippines meant for small businesses affected by the pandemic. House Bill 7749 was approved on final reading earlier this month.

Meanwhile, CREATE is already awaiting Mr. Duterte’s signature after Congress ratified the bill on Feb. 3. The measure, once enacted, will immediately bring down corporate income tax to 25% from 30% and will streamline fiscal incentives. — L.W.T. Noble