Sorry, No New Loans; My Friends Have Not Paid
The Philippine Star
April 08, 2002

US investment Salomon Smith Barney has painted a precarious outlook for the Philippine banking industry, and there are reasons to be concerned.

In a study, Salomon said the local banking sector's non-performing assets or NPAs - a combination of non-performing and restructured loans as well as acquired assets - comprise a third of the total loan portfolio towards the end of the year.

To give some sense to this, latest figures from the Bangko Sentral showed the combination of commercial banks' non-performing loans (NPLs) and acquired assets have grown almost tenfold from P46 billion in 1996 (prior to the crisis) to P440 billion in 2001.

Some of these bad loans include banks' multi-billion exposure in National Steel Corp., leisure firm Mondragon International Philippines, mall operator Ever Gotesco, the JG Jacinto Group and recently, vehicle battery maker Ramcar.

To be a little exaggerated but still truthful, these bad loans are now equivalent or even bigger than the industry's total capitalization. Imagine the systemic risks involved should banks fail to liquefy these assets. Much worst than this is its repercussion to the whole economy.

Bankers agree that from all indications this is not a cold that would easily go away. It's not even a new virus that the banking community has recently come across, being very much in the same strain as the Asian financial flu of 1997 which sent most lenders and borrowers - even the most creditworthy - to the hospital bed.

This early, the huge amount of bad debts has started to impact on the bank's bottom line, with some even reporting negative rates of return on equity (ROE).

Take the case of the Philippine National Bank (PNB), which bad debts have reached half of its total loan portfolio. Even the country's two largest banks - Metrobank and Bank of the Philippine Islands - have not been spared, with the latter even starting to aggressively write off some debts while it still has the extra resources to do so.

One impact to the economy of these bad debts is the very limited new loans granted by banks and the continued high lending interest rates despite the easing monetary policy.

Let Banks Bite the Bullet

All told, this is not to say the situation is hopeless.

Recently, the Lower House approved on third and final reading the proposed Special Purpose Asset Vehicle (SPAV) bill that would set the legal framework for the creation of asset management companies (AMCs). These firms would buy banks' NPAs at substantial discounts, then sell them at the "proper" price once the market recovers. In the meantime, AMCs would sell participation certificates and debt instruments in the form of investment unit instruments to investors, while at the same time acting as "work-out and turn-around specialists" of these NPAs.

For local commercial banks, SPAV is their version of the government's Asset Privatization Trust (APT) that was mandated to turn behest loans and properties into profitable ventures. How successful SPAV would be remains to be seen, and from all indications it's not likely to be soon enough. It is an interim agency that is not peculiar to the Philippines, especially with neighbors such as Thailand and China starting to reap the fruits of their respective SPAVs. But unlike the Philippines, our neighboring countries underwent a faster process since theirs involved government funding. Noticeably, their NPL rate has started to taper off, unlike that of the Philippines which is still on the rise.

When foreign investors Lehman Brothers and Cerberus talk of discounts, it's the honest-to-goodness sale that could range anywhere from 50% to 80%; the real BAGSAK PRESYO so to speak. For example, an AMC would in effect purchase a P1 million loan for just P200,000; this would leave the bank with no option but to charge the balance of the loan to bad experience. A better way of putting it, to quote finance secretary Jose Isidro Camacho, is that banks have no choice but to "bite the bullet."

Several proposed incentives in the bill would have given banks a graceful exit to their woes, but these are continuously being questioned. Even the rationale for putting up a SPAV has also raised the eyebrows of non-bankers.

Why bail out banks that have been "imprudent" in their lending practices? In the first place, it's not our problem that their condition has turned for the worst. Everybody has his own share of problems, so why then provide special favors to banks for their own "selfish" interests?

Banks Not Performing Role As Friends Fail to Pay

But then again, perhaps it's really everybody's problem. Because banks' lending capability was impaired by these huge bad debts, the impact of low interest rates have failed to trickle down to benefit the broad spectrum of our economy.

The problem has now become the banking community's excuse, so to speak. They complain that bad loans have driven up their costs of doing business, and as such they cannot provide the economy with money to spur economic growth.

In other words, the banks cannot give new loans to borrowers (even if the project is good) as their friends have not yet paid.

Key lending rates now are at its lowest in 10 years; but are the banks lending?

If these problems continue, the bottom line is that it's the economy that will lose out and everybody - not just the high-paid bankers - would turn out to be the victims. At this point, we don't have the luxury of time and resources to turn a blind eye on the banking sector's problem. A Tagalog platitude befits the situation: "Ang sakit ng kalingkingan ay sakit ng buong katawan."

If SPAV is the solution, then let's put it in place. But let us also make sure that the "bad bankers" who have brought us to this shameful state not just get free relief so much so that they would once again be in a position of advantage to repeat another cycle of bad loans of borrowing friends not paying back.

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