NPL ratio of banks stays at all-time low of 2.45%

The proportion of soured loans to the outstanding credit extended by universal and commercial banks stayed at the historic-low level in July as lending standards remained prudent, according to the Bangko Sentral ng Pilipinas.

In a report, the BSP said nonperforming loans as a percentage of outstanding loans, called the nonperforming loans (NPL) ratio, was maintained at the lowest-ever level of 2.45 percent as of end-July, the same as that as of end-June.

Loans become nonperforming, or described as “bad debts,” if these remain unpaid at least 30 days upon maturity.

The central bank said the manageable level of debt exposure of universal and commercial banks was a result of both the increase in outstanding loans and the decline in bad debts.

The fact that bad debts were falling despite moves of banks to extend more loans indicated that borrowers have improved their capacity to pay their obligations and that banks were keeping their lending standards strict.

Outstanding loans reached P2.98 billion, rising 17 percent from P2.54 billion over the same period in 2010. Meantime, nonperforming loans amounted to P73.05 billion, down 13 percent from P84.05 billion.

The BSP said the bad debts of universal and commercial banks remained adequately covered by capital. It said that their average NPL coverage ratio, the proportion of loan-loss reserves to bad debts, increased to 126.24 percent from only 112.57 percent over the same period last year.

The fact that the reserves for loan losses were higher than the actual bad debts carried by banks indicated that the universal and commercial banking sector would remain stable even if the bad debts they carry become nonrecoverable.

“The industry continued to provide adequate provisioning against potential credit losses,” the central bank said.

The BSP also reported that the proportion of restructured loans to total loans stood at 1.36 percent, falling from 1.73 percent a year ago.

Moreover, the nonperforming assets (NPA) ratio of the banks improved to 3.07 percent from 3.83 percent. NPA ratio is the proportion of nonperforming assets to gross assets.

NPAs include the NPLs of the banks as well as the properties they acquired from borrowers who defaulted on their loans.

Regulators said banks in the country have significantly improved their lending standards since the Asian financial crisis more than a decade ago. During that crisis, banks were heavily exposed to bad debts and carried many properties of borrowers that became difficult to sell due to a sharp fall in real property prices.

As an offshoot of the crisis, the average NPL ratio of universal and commercial banks exceeded 20 percent.

Regulatory reform as well as changes in the lending practices of banks led to the gradual decline of the NPL ratio.