Banks’ bad loans hit record low

THE LEVEL of soured loans held by major Philippine banks eased to a record low at the end of June, reflecting more prudent underwriting among industry players.

Data from the Bangko Sentral ng Pilipinas (BSP) showed universal and commercial banks’ non-performing loans (NPL) reaching the lowest level in history relative to the industry’s total portfolio.

This reflects recent moves by local banks to tighten lending standards for small businesses and consumers in general, and for real estate purposes in particular, amid expectations of rising funding costs in the months to come.

The NPLs of the country’s 36 universal and commercial banks eased to 1.8 percent of the industry’s total loan portfolio, the BSP said this week. This was lower than May’s 1.84 percent and April’s 1.89 percent. The previous record low was set in November 2014, the first time the banks’ NPLs dipped below 2 percent to settle at 1.82 percent of total industry loans.

A loan is considered an NPL once the borrower misses a payment date for more than 30 days. NPL levels are used as the main measure for the quality of assets in a bank’s books.

More money than necessary was set aside by industry players to cover potential losses from these soured credits. Should all NPLs turn into defaults, banks will be able to absorb the losses without issue.

At the end of June, loan loss reserves reached 2.54 percent of the industry’s total loans, or the equivalent of 141.67 percent of all NPLs. This was better than the reserves of 136.05 percent recorded in April this year and the highest level since last December, BSP data showed.

Since last year, rising funding costs and stiffer regulations have forced major banks to tighten credit standards for small and medium enterprises, and households.

Interest rates were hiked by the BSP last year, the effects of which have a lag that can last for about a year and a half, central bank officials said. Stiffer capital requirements were also put in place last year, making lending to riskier borrowers less profitable.