How can Philippine banks fully shed off bad loans?

NPLs hit $3.2b as of September 2017 with NPL ratio at a stable 1.9%.

With historically low NPL volumes despite its small regional market share, the banking system in the Philippines has proven its resilience time and time again especially after the Asian financial crisis, according to a study from accounting firm Deloitte.

Gross NPL ratio of NPL banks has been on a steady decline from a peak of 17% to 3.5%. As of September 2017, NPL ratio is at a healthy 1.9% with bad loans valued at $3.2b.

The maturity of the country’s banking sector has also been accompanied by a gradual consolidation of banks as well as the exit of weaker players with the number of head offices falling from 758 in December 2015 to 618 in June 2016.

However, lack of government funds and enabling legislation is significantly slowing down efforts by the government to purchase NPLs itself. Deloitte points out a notable effort in the establishment of Special Purpose Vehicles (SPLs) brought about by the enactment of the SPV Act in 2002 which offered fiscal incentives including tax exemptions and transfer fee reductions and legal coverage for the establishment of private SPVs.

Despite its merits, the law has since expired but not before making significant NPL sales including those by universal bank Rizal Commercial Banking Corporation and by thrift bank Planters Development Bank to an SPV led by the International Finance Corporation under its Debt and Asset Recovery Program.

The Philippines can therefore look into enacting a similar law to stamp down the growth of bad loans like Vietnam did with the creation of Vietnam Asset Management Corporation in 2013. 

“To date, there are no specific laws in the Philippines addressing the collection of NPLs. Performance of general obligations and contracts remain under the Civil Code and there are still many gaps and questions regarding law enforcement,” Deloitte added.