NATCCO Submits Regulatory Relief Recommendation to CDA
With the lockdown in most parts of the country, co-ops deferred collection of loan payments from members in compliance with the Bayanihan Heal as One Act that declared a moratorium on loan payments, interests and fees. This resulted in decline in profitability.
Many people were unable to work or conduct business, it was expected that they would not have income and temporarily stop making loan payments.
The NATCCO Network gathered the financial statements of co-ops from December 2019 thru March 31, 2020. NATCCO’s Stabilization Fund System Team, composed of accountants and auditors who oversee the co-ops that are members of the Stabilization Fund System, studied the submitted financial statements. After presenting the detailed diagnosis of financial ratios to the Management Committee, NATCCO Network came up with proposals to the Cooperative Development Authority (CDA) on how co-ops can cope with the negative effects on profitability borne from the COVID-19 Crisis.
NATCCO proposed regulatory relief in three areas: 1) Staggered Provisioning of Probable Losses, 2) Conditional Accrual of Interest Income vs. Cash Basis, and 3) Use of the Restricted General Fund.
The use of restricted General Reserve Fund, according the BSP Circular 1082 dated March 31, is based on the BSP’s lowering the liquidity reserve for banks.
NATCCO’s first proposal was on Staggered Provisioning for up to five years.
From the data, it showed that “PAR 1-30 days of 16 co-ops have increased from 836M to P2.793 Billion from February to April. The total PAR has doubled from P2.756 Billion to P5.707 Billion. PAR1 has increased from 18% to 35%. This is the impact of the ECQ and the moratorium on the payments of loan. ECQ has forced some coops to close; even if some are open, they have difficulty travelling across their areas of operations.”
Accordingly, the full impact of the ECQ was felt in April and in the upcoming months.
“If a co-op has a deficit of P20 Million, provisioning can be done 4 or 5 million a year. This will cushion co-ops from incurring net losses during this pandemic and members can still receive dividends.”
NATCCO CEO Sylvia Paraguya said: “Clearly, there is a need to watch how the figures will move in the next months. We all know that coops try as hard to provide, but there are still amounts which are not yet provided in a good number of cooperatives. Although there are cooperatives which have fully provided in 2019 but will now be affected by COVID-19.”
NATCCO also requested the CDA to allow the Conditional Accrual of Interest Income versus Cash Basis.
The Team found that “a number of co-ops (under the study) have extended the term of the loan because of the moratorium. For some commercial banks, the moratorium is just a temporary grace period. Afterwards, the clients have to catch up in the payment of the principal and interest. Our coops would have wanted the same.”
However, in lending to the poor, an increase in the monthly payments is not easy. Thus, some coops extended the term without additional interest. Some coops still charge interest on the extended term and accrued interests during the ECQ were distributed over the life of the loan.
According to the Stabilization Fund System Unit Head, Sharon Marie S. Dy, CPA “In terms of accrual of interest income, following PFRS (Philippine Financial Reporting Standards), an enterprise recognizes income when it is earned – even if cash is not yet received. But co-ops are cash basis, following the PFRF (Philippine Financial Reporting Framework for Cooperatives) – income is only recognized when actual cash is received.”
NATCCO recommended conditional accrual of interest income. By year-end, co-ops should be able to identify borrowers with high probability of paying the accrued interest for the month of December prior to the issuance of the Audited FS. CDA to allow conditional accrual of income provided that it be validated by the external auditor.
But so far, the CDA has firmly denied the proposal. The CDA has reiterated that PFRF should be followed: income is recognized on cash basis.
The third proposal was to allow co-ops to use the restricted General Reserve Fund (GRF) to address liquidity problems.
The GRF is used to absorb the losses of cooperatives. Thus, the coop can incur a loss as much as the GRF without diminishing the Share Capital value of the members. Current figures from our database show that our General Reserve Fund as a percent of total assets is just at 4%, way below the 10% PESOS standard.
“We need to be ready to make sure that the coops can service the demand of the members. It is at this point that we can look at the restricted General Reserve Fund as a back-up liquidity reserve. At this time of crisis, can we dip our fingers into this fund in our asset side so that we can augment the liquidity position of the coops, assuming that this is funded and restricted. We can then require cooperatives to program replenishment of utilized Reserve Fund in the next three (3) to five (5) years,” the NATCCO CEO said.
As of June 16, the CDA is still studying the proposals.