According to Japanese mythology, earthquakes are caused by the giant Namazu (otherwise known as Onamazu) catfish, a mischievous animal that hides beneath the earth’s surface. When the Namazu waggles its caudal fin, the ground shakes violently, endangering the unwitting inhabitants above ground.
Just like an earthquake, a financial crisis will rock an unprepared government, and could deepen if not properly managed.
I have observed that a regional or global financial crisis occurs about once a decade since the start of the 20th century. Examples of these are the 1997 Asian financial crisis, and the global financial crisis of 2007–2008 which caused the collapse of the Lehman Brothers, once a leading financial services firm and the fourth-largest investment bank in the US at the time of its collapse.
After the COVID-19 pandemic struck the Philippines in early 2020, Congress passed a bill to help financial institutions (FIs) weather the fallout of the COVID-19 pandemic. President Rodrigo R. Duterte signed the bill into law last week — the Financial Institutions Strategic Transfer Act, otherwise known as FIST law. The FIST law repealed Republic Act (RA) No. 9343, otherwise known as the Special Purpose Vehicle (SPV) Act of 2002, and a law amending it, RA 9343. The FIST law improves on some of the features of the SPV law, with the principle objective of unburdening banks of their accumulated non-performing loans. Relieved of the task of managing NPLs, banks are expected to turn their focus to lending growth, thereby propelling the domestic economy’s recovery.
The goals of the FIST Law are: (i) to relieve financial institutions (FIs) of their bad debts and administration of non-performing assets (NPAs) that likely piled up during the COVID-19 pandemic; (ii) to boost economic activity by restoring the banks to a position where they can inject liquidity into the system; (iii) help the financial system perform its role of mobilizing savings to fund worthwhile projects that will help drive economic growth. The banking system has built-in cushions which allow it to absorb a certain level of losses while still carrying on with investment and lending. The establishment of resolution frameworks such as the FIST Law, will ensure that troubled FIs have an outlet for improving their financial standing.
Under the FIST Law, FIST corporations (FISTCs) are to be organized as stock corporations only, ruling out one-person corporations. The 25%-25% pre-incorporation subscription rules still apply. It means that of the required minimum authorized capital stock of P500 million, 25% must be subscribed for. Of the subscribed portion, 25% must be paid. A FISTC can acquire land provided that at least 60% of its outstanding capital stock is owned by Philippine nationals as defined under Section 3 of Foreign Investments Act of 1991. Also, the FISTC is considered a corporation vested with public interest. By its very nature, it has to have independent directors on its board, as required under Section 22 of the Revised Corporation Code of the Philippines. It must also meet reporting requirements such as compensation and performance reports.
The FIST law, just like the SPV law, stipulates that FIs may only transfer NPAs to FISTCs. Not everyone is welcome to invest in a FISTC. The FIST law contains a list of so-called “permitted investors,” which are the only ones eligible as provided for under Section 10.1(l) of the Securities Regulation Code. The minimum amount that a permitted investor may acquire or hold Investment Unit Instruments (IUIs) in a FISTC is P10 million. The FISTC must submit an investment plan to the SEC and be issued a Certificate of Permit to Sell or Offer for Sale Securities.
As for the transfer of assets to the FISTC, the FI is required to send a written notice to the borrowers’ last known address or e-mail registered and on file with the FI. The borrowers are entitled to several days to restructure or renegotiate the loan. Under the SPV law, the borrowers were given 90 days, which the FIST law has reduced to 30 days upon receipt of notice from the FI. The SPV law’s 45-day timeline for obtaining a “ruling” has been reduced to 20 working days from the date of application, after which a “certification” is issued to the FI seeking to transfer assets. The process for borrowers reacquiring their assets from the FISTC or subsequent transferee other than by the exercise of the right of redemption provided under the FIST Law will be subject to the terms and conditions as may be agreed upon by the borrower/owner and FISTC. All sales or transfers of NPAs to a FISTC are considered true sales after proper notice without the need for the borrower’s consent, in which the transferor transfers full legal and beneficial title to and relinquishes effective control over the transferred NPAs. The NPAs are thereby legally isolated and put beyond the reach of the transferor and its creditors.
The incentives and exemption privileges under the FIST law contain no significant changes from the SPV law. The transfer transactions are still exempt from the payment of: (i) documentary stamp tax (DST); (ii) capital gains tax (CGT); (iii) creditable withholding income tax (CWIT); and (iv) value-added tax (VAT), subject to the applicable regulations issued by the BIR.
With regard to the Net Operating Loss Carry-Over (NOLCO) of participating FIs, on the other hand, the FIST Law provides a timeline of two years from its effectivity, covering any loss incurred by a FI as a result of the transfer of an NPA, which will be treated as an ordinary loss. Such a loss incurred by the FI from the transfer of NPAs within the two-year period may be carried over for five consecutive taxable years immediately following the year of such loss. Under the SPV law, there was no timeline and reckoning period. The loss incurred as a result of the transfer of NPAs under the SPV can be treated as an ordinary asset no matter when such loss occurred.
The signing of the FIST Act will help ease pressure on the Philippine banking system via a collective undertaking of the government and private sector. It provides an impetus for government-owned and -controlled corporations (GOCCs), government financial institutions (GFIs), and the private sector to aid in the recovery of distressed businesses.
The big question on everyone’s mind now is: when and where will the next major financial crisis strike? Is our government ready if it were to happen?
The banking industry is vital to the growth of the economy. It provides financial services which aid in the efficient functioning of the economy more efficiently. With the passage of the FIST Act, we are looking forward to having a strong and resilient economy, and a financial system that can weather the adverse effects of the COVID-19 pandemic and support the economy’s recovery.
P&A Grant Thornton is one of the leading audit, tax, advisory, and outsourcing firms in the Philippines with 22 Partners and more than 900 staff members.
Mark Anthony Ponte is an Associate of the Tax Advisory and Compliance Division of P&A Grant Thornton
As published in BusinessWorld, dated 23 February 2021