1. On February 16, 2021, the Philippines government issued the Financial Institutions Strategic Transfer (FIST) Act to facilitate banks and financial institutions (FIs) to dispose of their non-performing assets (NPAs) and non-performing loans (NPLs) through transfers to FIST Corporations (FISTC).
2. The FIST Act is among the government’s priority legislation to strengthen the financial sector and enable banks and financial institutions to extend credit to more sectors and thus stimulating much-needed economic growth.
3. FISTC are asset management firms similar to special purpose vehicles and have been given the power to collect, dispose of, manage, and operate NPAs acquired from FIs under the FIST Act.
4. Through this measure, the government expects that the recovery of these financial institutions would spill over to other affected sectors of the community and help keep the economy afloat.
5. In addition, the transfer of NPAs from FIs to a FISTC will be exempt from value-added tax (VAT), withholding tax, stamp tax, and capital gains tax. There are also various incentives available for corporations, such as reduced rates for applicable fees.
6. To be entitled to the privileges of the FIST Act, the FISTC must be a stock corporation and cannot be incorporated as a one-person corporation. Applications for the establishment and registration of FISTC must be done through the Securities and Exchange Commission (SEC) within 36 months from when the Act is in effect (February 17, 2021).
7. The powers of a FISTC include:
-Invest or acquire NPAs;
-In the case of NPLs, restructure debt and other restructuring activities;
-Improve or renovate NPAs acquired from FIs;
-Issue Investment Unit Instruments (IUIs);
-Guarantee credit;
-Debt settlements involving NPLs;
-Issue instruments of indebtedness for operational costs; and
-Engage the services of third-party asset management companies for the collection and receipt of debts, among others.
8. In addition to its primary purpose of investing in, or acquiring NPAs of FIs, a FISTC shall also be allowed to restructure or condone debt, and undertake other restructuring related activities, in the case of non-performing loans of FIs, issue equity or participation certificates or other forms of Investment Unit Instruments (“IUI”) to qualified buyers and permitted investors, and engage third parties to manage, operate, collect and dispose of NPAs acquired from FIs, among others.
9. The minimum required capital to form a FISTC is PHP500 million (US$10.2 million), and if the FISTC acquires land, then at least 60 percent of its outstanding capital stock must be held by Filipino citizens. Moreover, the FISTC must have a minimum subscribed capital stock valued at PHP125 million (US$2.5 million), and a minimum paid-up capital of PHP31,250,000 (US$641,000).
ISSURANCE OF INVESTMENT UNIT INTRUMENTS (IUI)
1. Eligible buyers can acquire IUIs issued by the FISTC for the minimum amount of PHP10 million (US$205,000). An IUI is a debt instrument, or participation certificate, or similar instrument, issued by a FISTC and subscribed by qualified buyers, such as banks or insurance companies, among others.
2. The IUI is used for the purpose of acquiring, managing, and disposing of the NPAs acquired from FIs.
3. Any qualified or permitted investor may acquire or hold “investment unit instruments” (IUIs) in the corporation with a minimum amount of P10 million. Permitted investors are those considered qualified under the Securities Regulation Code such as banks, insurance firms, registered investment houses, and pension funds or retirement funds maintained by a government agency or a private corporation and managed by an entity authorized by the BSP or SEC, among others.
4. FISTCs are prohibited to acquire the IUIs of another FISTC. Moreover, the parent, subsidiaries, affiliates or stockholders, directors, officers or any related interest are not allowed to acquire or hold, directly or indirectly, the IUIs of the FISTC that acquired the NPAs of the financial institution.
5. There are various tax incentives and privileges for the transfer of NPAs from FIs to a FISTC. These are:
-Exemption from capital gains tax;
-Exemption from documentary stamp tax;
-Exemption from creditable withholding tax on transfers of ordinary assets;
-Exemption from VAT; and
-Reduced applicable fees of 50 percent
WEAK ASSET QUALITY A CONCERN IN JULY 2021
1. The BSP’s Banking Sector Outlook Survey for the first six months of 2021 showed 58.9% of the respondents expect their NPL ratio to go beyond 5% in the next two years. However, this is lower than the 63.5% of the respondents that anticipated this outcome in the survey for the second semester of 2020.
2. The industry-wide NPL ratio stood at a 13-year high of 4.49% in May as bad loans surged by 83% to P479.481 billion from a year earlier, based on latest BSP data. The BSP expects the banking industry’s NPL ratio to be a little above 5% by end-2021.
3. The banks’ projections are consistent with the BSP’s NPL estimates for the year 2021. The enactment of the Financial Institutions Strategic Transfer (FIST) Act as well as the issuance of its implementing rules and regulations in the first semester of 2021 will help limit buildup of NPLs in the financial system
4. The survey found that 54% of respondent banks expect to report NPL coverage ratio of more than 50% to 100%. This is higher than the 44.3% that said they intended to report higher NPL coverage ratio in the prior survey.
5. BSP data showed NPL coverage ratio — which indicates the allowance for potential losses due to soured loans — declined to 79.96% in May from 97.31% a year ago.
6. Meanwhile, 43.5% of lenders, mostly foreign banks, thrift banks, and rural commercial banks expect to see their restructured loan ratio to reach more than 5%, reflecting banks’ willingness to modify loan terms.
7. On the other hand, universal and commercial banks expect a more conservative restructured loan ratio of 2% and below. Restructured loans made up 2.47% of banks’ lending portfolio as of May.
8. In the next two years, nearly three-fourths (72.7%) of respondent banks expect double-digit growth in their loan portfolios on the back of expected improvements in economic situation.
9. Six in 10 surveyed banks also expect double-digit growth in bank assets. Based on the study, 41.9% of banks surveyed said gross domestic product (GDP) will likely grow by around 5-6% in the next two years. One in five banks are more bullish, projecting GDP growth to reach 6-6.3%.
Source:
https://www.aseanbriefing.com/news/philippines-launches-fist-act-to-protect-banks-and-financial-institutions/
https://www.zicolaw.com/resources/alerts/fist-act-enabling-transfers-of-non-performing-assets-of-financial-institutions-to-a-special-corporation/
https://www.bworldonline.com/fist-law-to-cast-safety-net-for-banks/
