RA No. 9343 allows the establishment and registration of new Special Purpose Vehicle (SPV) for another 18 months (up to November 2007) from the law’s effectivity and grants extension of the tax exemptions and fee privileges to financial institutions (FIs), SPVs and any individual on the transfer of non-performing assets (NPAs) from the FI to an SPV, from an SPV to a third party or dation in payment (dacion en pago) by the borrower or by a third party to an FI or an SPV in accordance with the Act’s Implementing Rules and Regulations (IRR).
The SPV law engenders the speedy recovery of the Philippine banking system from the huge burden of disposing NPAs from banks to SPVs or individuals through the grant of fiscal incentives. SPVs, in turn, would then assume the rights and obligations of the bank in collecting and restructuring the NPLs or in selling the ROPOAs. In effect, buyers of NPAs actually help the country detoxify itself from the adverse repercussions of a high incidence of bad loans, which if allowed to linger in the financial system, would be disastrous to the economy as a whole.
However, the success of RA No. 9343 is affected by several issues. For one, it is observed that it is not easy to get a fair return on the NPAs due to the lackluster performance of the property market in the country which is further affected by the constitutional ban on foreign ownership of real estate in the Philippines. As noted, if the SPV will acquire land, foreign investors’ equity is limited to only 40%, with the rest of the shares of the capital stock being owned by Philippine nationals. Apart from this, the tax incentives and fee privileges offered to SPVs are still not enough to outweigh the huge amount of capitalization required in setting up an SPV.
Another obstacle to the success of the law is the pricing, i.e. the considerable gap between the target selling price and the bid price of assets marked for disposal. Banks are not willing to accept significant losses even though the BSP granted them deferred booking of losses over a period of ten (10) years. On the part of the SPV, the maximum discount or the lowest value for assets generally reflects its earnings. Negotiating a low acquisition value from the banks is, therefore, crucial to the SPV’s profitability and its ability to quickly dispose of the NPAs. At this juncture, it may be observed that the average discount rates under RA No. 9343 for NPA sales (50% for NPLs and 35% for ROPOAs) of banks are quite low. Other factors that contribute to the failure of RA No. 9343 to meet its objectives include other legal issues like those involving the Anti-Dummy Law because some banks have resorted to setting up and dealing with their own SPV instead, which is not legally permissible under the SPV Act.
Lastly, the practice of transferring a bank’s bad assets to a private or public SPVs or AMCs has become an international practice. Many countries have recognized this strategy as a meant of alleviating the bad loan problems of their respective financial systems. Some Asian countries restructure their banks through centralized AMCs like Danaharta in Malaysia, Indonesia Bank Restructuring Agency (IBRA), Korea Asset Management Corporation (KAMCO) in Korea and Thailand Asset Management Co. (TAMC). The Philippines, India and Taiwan are the only economies in Asia that pursued private sector-led AMCs, instead of government or centralized AMCs. In the US market, there are institutions that act as principal intermediaries for purposes of purchasing mortgage loans. Their role could be likened to those of SPVs. On the other hand, according to the Trust Law in Argentina, a trust takes a similar form as that of an SPV where a person (the trustor) transfers the ownership in trust of certain assets to another person (the trustee who is a financial institution) who must manage the assets for the benefit of the party specified in the trust agreement (the beneficiary), and transfers the trust property upon termination of the trust to the trustor or the beneficiary. Furthermore, in Morocco, SPVs can be: (a) institutional investors in debt; or (b) other entities which are governed by the legislative or regulatory system of either Morocco or other foreign countries. The functions of its SPV are administered by its management depository institution, which is akin to AMC in India.
In sum, the objective of further lowering the level of NPAs of banks as of June 30, 2002 by as much as P100 billion was not achieved via the extension of incentives for two more years under RA No. 9343. It is therefore suggested that banks should craft a more prudent loan policy to avoid or minimize the occurrence of high incidence of NPAs. Among others, this policy should contain strict adherence or compliance to: (1) loan repayment conditions; (2) comprehensive audit of borrowers; (3) collateral and other financial capability criteria; (4) project viability; (5) monitoring and assessment of loan status as of a given period, etc.
