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Deepening asset, capital reforms in 2006 |
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By Ted P. Torres
The Philippine STAR 01/10/2006 For 2006, the Bangko Sentral ng Pilipinas (BSP) will continue to put emphasis on asset clean-up while strengthening the capital build-up efforts of the country’s banking system. The sustained thrust would result in the consolidation of the system within the next three years. The monetary authorities will also urge the banking system to introduce more banking products to capture, redirect and transform remittances from mere consumer spending to more productive processes. "We intend to further deepen reforms in the banking system in 2006, a process that my predecessor initiated to pull the financial system out of the doldrums originally triggered by the 1997 Asian financial crisis," BSP Governor Amando M. Tetangco Jr. said in an interview. At the end of 2005, the banking system remained plagued by the high level of non-performing assets (NPAs) in their books in spite of the considerable clean-up process under the original special purpose vehicle law (SPV Law). These restricted new lending as well as profitability. The industry already unloaded P97 billion worth of NPLs last year. Thus the NPL ratio stood at 9.5 percent last year from the high 18 percent in mid 2002, although it is still half of the peak level in the pre-1997 levels. Yet, banks have made only a small dent on their inventory of acquired assets arising from soured loans. The good news is that the House of Representatives has approved a bill seeking the extension of the SPV Law by another two years. It must still however get the nod of the Senate, then the bicameral congressional committee before it can be signed into law. "We hope that the extension of the law will result in the cleanup of at least another P100 billion. This will bring down the NPL ratio to less than seven percent," Tetangco said, adding that the capital adequacy ratio (CAR) of commercial banks have already improved to 17.46 percent as of June 2005, well above the international benchmark of eight percent. The monetary authority likewise encourages greater flexibility for banks to enter into joint ventures to enhance the marketability of their assets particularly undeveloped foreclosed properties. This will not only clean up balance sheets but also potentially boost the housing, and even tourism, markets. There is a "phenomena" evolving where property developers are aggressively attracting not only the foreign buyers but also migrant Filipinos and OFWs. The BSP is also following through with the enhanced regulations to strengthen corporate governance, risk management, and capital adequacy in the system with effective and efficient enforcement. The changeover to the International Accounting Standards/Financial Reporting Standards (IAS/IFRS) already begun last year, and the system is moving towards Basle II compliance starting January 2007. "Realistically, we do not expect full compliance to happen immediately. It will be a journey and we have taken the first few but decisive steps," Tetangco said. Meanwhile, remittances through the banking system has in general been used mainly for savings, consumer spending and other basic necessities. While that situation fueled the economy last year, it is short term and unprofitablity. "It must be harnessed. Aside from acting as the channel to course the remittances back to the families of the OFWs, the banks must device more productive means in harnessng remittances," the BSP Governor said. Banks must introduce more investment products, and use the remittances to finance small and medium enterprises (SMEs) including those established by the migrant’s families. Remittance as a business itself must be expanded to reduce cost while increasing efficiencies, and remittanes must be linked to microfinance and small lending. Remittances grew by 27 percent to $8.8 billion from January to October last year higher than the $8.6 billion registered in the entire 2004. The BSP estimates that 2005 remittances would hit a new level of $10.7 billion (coursed through the banking system), and more than $12 billion overall. Aside from the extension of the SPV Law, the BSP will continue its advocacy for the enactment of the Credit Information System Act as well as the amendment of the BSP Charter. The first will help establish of a comprehensive credit information system that is expected to lower the cost of credit, provide greater access to credit in general, and reduce the dependency on collateral-based lending. The second will give more teeth to the BSP as a more effective monetary authority and banking regulator. Meanwhile, the BSP lifted the moratorium on bank branching as well as liberalizing outsourcing possibilities. It had also allowed the bank’s to introduce a wide array of treasury, consumer, and wealth management products. The combination of stronger regulations, liberalized policies in some businesses, and the strict implementation of new accounting and capital standards however should also led to further consolidation of the system within the next three years. "This will be brought about by (1) a stronger regulatory framework that will hasten the exit of weak banks, hopefully on a voluntary market-based basis; (2) the increasingly stronger competition by existing foreign banks and new foreign investors coming in into existing banks; and (3) the rigorous technical demands posed by modern banking and finance standards. We see a banking landscape dominated by a relative handful of main banks complemented by a plethora of smaller banks that serve various well defined market niche," the regulator explained. And beyond the developments in the banking system, the regulator wants parallel developments in the country’s capital market. "With improvements in the infrastructure for the trading, clearing, and settlement of fixed income securities beginning with government securities, we see a real chance for rapidly developing the domestic capital market," Tetangco said. A well developed bond market will further deepen the domestic capital market. This will provide a richer array of investment opportunities for the public, allow greater flexibility for public finance, allow the private sector to have more funding flexibility, provide greater scope for interest rate risk management, and provide a more reliable signaling mechanism for pricing financial assets. Internally, the BSP is adopting risk-focused supervision and examination to emphasize its supervisory priorities. "The banking industry can expect many meaningful changes, we strongly believe for the better, this year and in the coming years as we more fully adopt international best practices. The objective is to have more stable, more efficient, and a more depositor and customer friendly banking system," Tetangco added. |
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