The FIST Act
Loans granted by the Development Bank of the Philippines (DBP) in favor of the Lopez Group of Companies that were later allegedly condoned, amounting to nearly P2 billion, were again raised in a Congressional inquiry by the House Blue Ribbon Committee, chaired by Rep. Michael Aglipay. In the continuation of the meeting held last Wednesday, Rep. Aglipay resumed talks with the submission of the documents required from the resource persons.
The discussions brought to light the use of special purpose vehicles (SPV) in loading off non-performing loans (NPL) that will bring forth much-needed liquidity in the market. The earlier SPV law had already expired, but as pointed out by the representative of the Bangko Sentral ng Pilipinas (BSP), Atty. Noel Malimban, President Rodrigo Duterte just signed a new law to revive the usage of SPV, in recognition of their contribution to the improvement of the economy at the time of the pandemic.
On 16 February 2021, President Duterte signed the Financial Institutions Strategic Transfer Act or FIST Bill into law. It aims to prevent massive loan defaults and bankruptcies which can cause unwanted destabilization in the country’s financial system.
The International Monetary Fund (IMF) previously expressed its concern on the country’s capability for financial recovery, given the high number of Covid-19 cases and the inadequate measures put up to further reduce cases. It predicted that the GDP of the Philippines will decline by 8 percent, which will be the worst in Southeast Asia.
Due to the recession caused by the pandemic, there has been a significant increase in NPL, as well as past due loans, demonstrating firm inability to service their interest and principal debt payments to banks. NPL had jumped from 26.7 percent to P273 billion in June 2020 compared to P215.91 billion on June the previous year.
Despite the proclamation of the Department of Finance Secretary Sonny Dominguez of the Philippine Guarantee Corporation (PhilGuarantee) providing more loans to micro, small to medium enterprises (MSME) to avert more bankruptcy and personnel layoffs, loans are merely temporary measures to assist firms from going under as the economic normalizes.
Bayanihan 2 or Republic Act 11469 contained provisions which aimed to provide cushions for firms through a “60-day grace period” for payment of all existing, current and outstanding loans due on or before 30 December 2020. If another grace period is to be declared, financial institutions will be facing major liquidity and solvency issues.
Under Republic Act 11523 or the FIST Act, banks and financial institutions will be able to transfer of NPL and assets, granting them an opportunity to clean books and re-channel their resources to improve the overall liquidity in the country’s financial system. The FIST Act provides a legal framework for the establishment of special purpose corporations, known as Financial Institution Strategic Transfer Corporations (FISTC). The law also provides tax incentives in the transfers of nonperforming assets (NPA) to and from the FISTC.
The FIST Act repeals the Special Purpose Vehicle Act of 2002. The SPV Act helped banks dispose of their NPA due to the Asian Financial Crisis by providing a legal framework for the said purpose accompanied by tax incentives. The banks stopped the creation of SPV as the period of granting tax incentives in transaction has expired.
But the FIST Act is essentially the same
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Despite being very similar to the SPV Act, the country’s economic managers await to see the performance of the FIST Act in undertaking the problems of the financial sector with its non-performing assets and loans.
in terms of the creation of SPV and its mandated functions. FISTC are granted exemptions from income tax, documentary stamp tax and mortgage registration fees in certain loans, they are all exempt from documentary stamp tax in cases of capital infusion to a borrower with NPL.
Despite being very similar to the SPV Act, the country’s economic managers await to see the performance of the FIST Act in undertaking the problems of the financial sector with its non-performing assets and loans.
Aside from the FIST Act, the President is expected to sign the CREATE bill soon, which is now on his desk. Congress shall be deliberating upcoming tax reform packages and the Government Financial Institutions Unified Initiatives (GFI) to Distressed Enterprises for Economic Recovery or GUIDE Act.
The GUIDE Act proposes a P10billion allocation to PhilGuarantee, the DBP and Landbank, enabling them to grant more loans to MSME. The proposed act also grants LBP and DBP to enter in joint venture agreements with a special holding company to assist Strategically Important Companies.
With these developments, the people should be assured that legislators are doing what they can in mitigating the effects of the pandemic.
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It aims to prevent massive loan defaults and bankruptcies which can cause unwanted destabilization in the country’s financial system.