Bonds could fund Philippines' NPL agency

The Philippine government is looking at a proposal to set up an NPL agency with receipts from bond deals.

The government of the Philippines is considering a proposal to fund the setting up of a non-performing loans agency by issuing around Ps200 billion ($4.14 billion) in bonds. The idea came from Vitaliano Nanangas, chairman of the Social Security System (SSS), the state agency with responsibility for giving protection to private sector workers.

Before the Asian crisis took hold in 1997, the NPL ratio in the Philippines was under 4%. That figure has risen significantly over the last four years, currently standing at 15%, and the new administration has identified it as a problem that needs to be rectified.

Trying to do so by setting up an agency to firstly purchase bad loans off domestic lenders at a discounted rate and then try to recover a decent percentage of the loans, would follow the lead set by Kamco in Korea and similar ventures in Malaysia and Indonesia.

These companies, also known as asset management companies, are seen as one of the better ways to clear NPLs out of the private banking system. This belief is based on the fact that an agency whose sole purpose is to recover bad loans will be more successful in doing so than a private bank who has relationships with some of the clients in default.

The idea of issuing bonds to set up the company is seen as beneficial, as the costs of redeeming the notes are partially offset by the benefit of being able to do so over a longer period of time.

New finance secretary Albert Romulo has given his backing to the idea and it has been reported that President Gloria Macapagal-Arroyo has also given provisional approval.

"The initial proposal from the chairman has been well received by the finance secretary and the president," says an SAS official. "They're now waiting to see a more detailed blueprint with the actual terms and conditions."

The official was not able to give any indication on exactly when that plan would see the light of day, when the agency might be set up or when any bonds may be issued. "Nothing is definite yet but we hope to hear something soon," she continues. "What we can say is that the financial sector agrees that NPLs need to be looked at and most agree the agency is a good idea."

The latest development is one of a series of ways the government is looking at to address concerns over the state of the economy. Last week it confirmed it was looking again at proposals for either a gambling or gas-backed securitization to raise money to clear some short-term debts. Local bankers remain pessimistic, however, that any deal will ever see the light of day.

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