Philippines President Rodrigo Duterte has signed the Financial Institutions Strategic Transfer (FIST) Act, a law that will enable firms “to offload souring loans and assets, clean up their balance sheets, and extend more credit to more sectors in need”.

The goal of the new legislation is to cushion the impact of the Covid-19 pandemic on financial institutions.

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Under the FIST Act, banks and financial institutions can dispose of their non-performing loans (NPLs) and assets through asset management companies similar to special purpose vehicles (SPVs) formed 20 years ago after the Asian financial crisis.

Solution to a worrisome problem

Data from the Central Bank of the Philippines shows that gross NPLs in the banking system climbed to 391.66bn Philippine Peso (PHP), or 3.61% of total loans, as of December 2020 from 234.99bn PHP in January 2020.

Part of the economic recovery program of the Duterte Administration, FIST will strengthen the financial sector by enabling banks to extend credit to more sectors in need, said presidential spokesperson secretary Harry Roque, Jr.

The law creates specialised asset management firms that will acquire non-performing assets from distressed financial institutions.

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Hope for stability and growth

“The new law will help keep the banking system stable despite the effects of the Covid-19 pandemic,” said central bank governor Benjamin Diokno in a Twitter post.

He added that FIST is expected to reduce the NPL ratio by about 0.63 to 7.0 percentage point.

The expectation is that FIST will extend borrowers’ access to credit and financial services, and allow them to spend more to boost the economy.