The Philippine central bank has introduced a looser policy on bad loans that should make banks more attractive to investors, according to a senior central bank official.Under the new rules, a bank need not class a loan as bad if it had provided for possible non-payment by setting aside money equal to the entire loan value, the official, Deputy Governor Alberto Reyes, said.
The change would affect the classification of about 45 billion pesos ($869 million) in debt, two percent of all the loans extended by the banks.
“If (the banks) do this, there could be a two percentage point reduction in the (non-performing loans) of the commercial banking sector,” Reyes said.
“This is not purely cosmetic on the part of the central bank. The move should also help banks, in general, become more attractive to investors.”
At the end of June, 289 billion pesos ($5.58 billion) in loans, or 18.06 percent of all loans in the Philippine commercial banking system, were at least 90 days in arrears and therefore classified under the old rules as non-performing.
Banks held 136.75 billion pesos in reserves as provisions for non-payment of those loans, up 0.8 percent on a month earlier.
Despite Reyes’ expectation that the rule change should make banks more attractive, it was not clear on Sunday how shareholders or creditors would be affected by removing some loans and their 100 percent provisions from a bank’s list of bad debts.
He and other central bank officials were unavailable for further comment on Sunday.
Banks and investors have been waiting for the passage of a bill to create asset management companies that would buy banks’ bad loans. The sale of bad loans is expected to allow banks to strengthen their financial position and lend out more.
The country’s biggest bank, Metropolitan Bank and Trust Company, has already signed a deal to sell over 16 billion pesos worth of bad loans to a foreign group led by Rabobank Nederland.
Other major Philippine banks include Bank of the Philippine Islands, Equitable Banking Corp and Philippine National Bank.
Reyes said banks could apply the revised computation of non-performing loans if they met the central banks requirements for general prudential reserves and for reserves as provisions against bad debts.