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Mar 03, 2021

Banks’ Management of Non-performing Assets and the FIST Law

Covid-19 outbreak has come across as a bigger challenge for the financial sector, and this concern is not limited to any single economy, but universally applicable to the countries across the globe.

As per the estimates by CRIF Global Transformation Services, India, Philippines and UAE will keep the highest level of NPA (Non-Performing Assets) ratio, with India expected to exceed 20%. Other countries like Austria, China, Indonesia, Switzerland and the United Kingdom will have a huge increase on their NPA volumes compared to pre-Covid levels (> 200%). As such, this is going to be the number one priority for global central banks to face in the post-Covid agenda. 

Credit holidays and government support measures have so far limited the outbreak of NPAs. But these relief measures are reaching their sunset period, which will bring out the true picture of Covid-19 impact on delinquencies and asset quality. In the Philippines, moratoriums 1 and 2 allowed by Bangko Sentral ng Pilipinas (the Central Bank) ended in Dec 2020 and the impact is already visible.

How are loans classified as per their overdue ageing?

The Central Bank requires the loan assets to be classified on the balance sheet of banks as below:

  • Loans without any overdues are classified as current. 

  • Any loans with overdues up to 30 days are still classified under ‘Pass’ category, wherein the borrower reflects ability and willingness to pay. 

  • Once the overdue ageing increases beyond 30 days, the loans are classified as ‘Special Mention Accounts’. 

  • If the overdues cross the 90-day past due period, loans are classified as Non-Performing Assets with further classification as substandard, doubtful and loss assets. 

High NPAs – Assets turning into liabilities - Financial impacts

A high ratio of NPAs is a financial burden for the banks, with impacts like:

  • Lower profitability/Net interest income

  • Higher regulatory capital requirements

  • Cascading impact on the funding cost inching higher

  • Additional cost to manage and recover NPAs

  • Negative impacts on the economy

What next after NPA recognition?

  • Regular discussions with the borrower for clearing overdues.

  • Determining workout plan like restructuring, settlement, legal proceedings etc. 

  • Preparing an exit plan by selling the assets to asset management companies/third parties.

FIST (Financial Institution Strategic Transfer) Law - A government initiative for economic recovery

The Philippine government has implemented FIST law to operationalise the swift exit process for the bad assets of the banking entities and free up the regulatory capital for further economic use for such entities.

  • As part of the exit plan and strategies, an FI has an option to sell NPAs to FIST corporations.

  • FIST Law allows for the creation of corporations that invest in or acquire non-performing loans (NPAs). 

  • All sales or transfers of NPAs to an FISTC shall be in the nature of a true sale.

Will the FIST Law streamline the recovery process from the bad loans? 

The move is expected to free up P1.19 trillion worth of loans and allow banks to lend to some 600,000 MSMEs (micro, small, and medium enterprises) and save over 3.5 million jobs.

Here is how it streamlines the recovery process:

  • FIST does away with the requirements that delayed the transfer of assets without diminishing the rights of borrowers under existing laws.

  • Provide immediate cash/ liquidity to the bank against bad loan.

  • Eliminate the credit risk towards such loans from the Balance Sheet.

  • Maximisation of realisation from such assets with expertise and focused resources in collections and recoveries. 

How can banks take full advantage of FIST Law?

  • Banks should have in place scoring models for portfolio management and collection prioritization.

  • With these scoring models in place, banks are able to properly identify accounts with least potential of recovery and take immediate action.

  • Automating the processing, execution, and identification process for bad loans.

  • Timely exit from such loans for better economic recovery from such assets. 

How can CRIF help you in bridging the gap?

Since monitoring 100% of loans for regular collection efforts may not be possible, banks must have focused collection efforts on potentially bad assets, for which it is imperative to have an early-warning system. 

  1. Data requirements

Setting such early-warning signal system can require the bank to have comprehensive data in respect of the owner, business, industry, economy, financial and credit repayment information, transactional data, and existing charges on collateral and securities.

  1. Leveraging data

  • Such data can be retrieved from internal sources, including existing transactions and loans, external sources like bureaus, corporate registries, etc. 

  • Such data, once sourced, can be validated with quality checks on all input fields and the creation of synthetic indicators.  

  • All derived variables can be calculated automatically with appropriate data visualization.

  • Automation is not only limited to an automatic application decision but automation of several credit processes, including credit appraisal, loan pricing, credit limit, loan disbursement, client communication, borrower notifications, and MIS/regulatory reporting. 

CRIF has been a Special Accessing Entity (SAE) of Credit Information Corporation since 2016. With data of more than 21 million individuals and 1 million businesses with 50 million credit lines, CRIF can be your ideal partner for data analytics, SME scoring, and rating system for your organization. 

Owing to its industry experience and availability of large customer data with several variables, CRIF can help you bridge the gap and build a robust credit framework. Our key services range from assisting in scorecard development, validation of data sampling, monitoring data processes, and implementing the process to automate credit risk grading. 

Here are some of the specific areas wherein CRIF can assist you:

  1. Providing suitable inputs and data points for informed decision-making.

  2. Leveraging CRIF experience with similar projects in many financial institutions and banks in Europe and other countries, including detailed analysis of several different angles of your processes.

  3. Providing clear recommendations on the initiatives to be implemented to close gaps against the leading practice and best planning to optimize ROI.

  4. Implementation of the best-in-industry practices to assess and benchmark the credit risk assessment, leading to better asset quality, suitable risk pricing, and consequently better returns on investment. 

Interested in learning more about FIST Law, and how it is helping banks to manage the bad assets? Contact us today to start a conversation.

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