Behest Loans, Non-performing Assets, Low Growth – Deja Vu

The economic crisis that ended with the ouster of Ferdinand E. Marcos
in the 1980s and that which led to the resignation of Estrada were both
largely caused by the financial abuses that resulted in largescale
wastes of investment resources. After a brief overview of the two
crises, bad banking practices that led to the insolvency and high
non-performing loan ratios of troubled financial institutions are
described. They reveal the vulnerability of the financial system to
political pressure and personalized banking, and cases of abuse of
political power. The dismal national savings rate of the country is
likewise discussed. Policy directions are suggested to correct such
malpractices and proscribe their comeback.

The 1983-85 economic crisis had its main root in the grave misuse of
financial institutions by Marcos and his cronies. We see a repeat of
corruption of some financial institutions in recent years. In the 1970s
and 1980s, the GFIs, particularly the Development Bank of the
Philippines, the Philippine National Bank, the Philippine Veterans Bank
and the Government Service Insurance System, were used
to funnel funds to crony hands ostensibly for investment. The practice
was to front-end the loans, i.e., propose a project with little or no
collateral, pocket the loan proceeds and invest a small fraction for
show. The funds financed capital flight and other investments. Cronies
raided their own banks. At the time the Central Bank was heavily
involved in development financing allowing it to supply loanable
funds to banks and GFIs. The 1970s was also a time for large scale
foreign borrowing and the Central Bank used this source to add to the
funds that Marcos and his cronies could appropriate. The practice
created the terms behest loans and front-ending.

The 1983-85 economic crisis that ended with the ouster of Marcos was
largely caused by the financial abuses that resulted in large scale
wastes of investment resources. The financial abuses have documented
consequences. So many crony projects were left uncompleted or bankrupt,
all the GFIs excepting for the Social Security System were left with a
large stock of non-performing assets. The Philippine Veteran Bank was
bankrupted and had to close down and the DBP, PNB and GSIS became
insolvent and left with high NPL ratios of 65%, 35% and 50%,
respectively. The Cory government was faced the choice of closing down
the GFIs or restructuring their portfolios to their present worth. The
latter was chosen with a proviso that they had to mobilize their own
funds and no longer rely on central bank loans. The Asset Privatization
Trust was created to manage the NPAs of the GFIs. The bad assets of DBP
and PNB were taken over by the Trust, which meant reducing their
resource level. The private banks including numerous small unit rural
banks and some crony banks that became insolvent were allowed to close

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