Thrift banks cut bad loans

MANILA, Philippines—The exposure of thrift banks to bad debts shrank, but that of rural and cooperative banks grew in the first quarter, as the entire banking industry extended more loans to individuals and enterprises.

This was according to the Bangko Sentral ng Pilipinas, which reported Friday that although thrift banks lent more, they were able to trim their level of exposure to loan defaults given the better creditworthiness of their clients.

On the other hand, rural and cooperative banks suffered from higher levels of bad debts as they extended more credit.

Data from the BSP showed that the thrift banking sector’s average non-performing loan (NPL) ratio—the share of bad debts to their total loan portfolio—improved to 6.56 percent by the end of the first quarter from 7.85 percent as of the same period last year.

The latest NPL ratio for thrift banks was also better quarter on quarter. The ratio stood at 7.32 percent by the end of the fourth quarter of last year.

NPLs, or what may also be called as “bad debts” or “soured loans,” are those that have remained unpaid from at least 30 days after either interest or principal payments fell due.

On one hand, combined NPLs of thrift banks amounted to P23.06 billion by end-March this year, down year on year by 8.5 percent from P25.19 billion. On the other, their total loan portfolio amounted to P351.81 billion, rising by 9 percent from P320.9 billion.

For rural banks, meanwhile, their total loan portfolio also grew as their appetite for extending credit and demand for loans from the countryside expanded. However, the growth in their loan portfolios was outpaced by the increase in their bad debts, thus resulting in a higher NPL ratio.

The NPL ratio for the rural banking sector broke into the double-digit territory by the end of the first quarter, hitting 10.39 percent. This was up from 9.43 percent as of the same period last year and from 9.88 percent by the end of the fourth quarter of last year.

Total loans of rural banks amounted to P105.3 billion, rising by nearly 6 percent year on year from P99.35 billion.

The rise in their combined bad debts over the same period, however, was much faster at nearly 17 percent to P10.92 billion from P9.36 billion.

Cooperative banks had a similar story. They suffered from an increase in average NPL ratio as the increase in their loan portfolios was outpaced by the rise in loan defaults.

NPL ratio of the cooperative banking sector hit 8.14 percent by the end of the first quarter, up from 7.06 percent as of the same period last year and from 7.92 percent by the end of the fourth quarter of last year.

This came about as their combined loan portfolios amounted to P11.8 billion, growing year on- year by 7.6 percent from P10.97 billion, and as their bad debts rose by nearly 25 percent to P960 million from P774 million.

The rising NPL ratios of rural and cooperative banking sectors is one of the reasons the BSP is urging members of their respective industries to consider consolidation. That is, strong industry players are encouraged to acquire weak ones to avoid closures and to improve the overall standing of their industries. Another reason is the intention to improve governance in their industries. Financially stronger banks are also deemed to have better governance systems than weaker players.

The BSP, together with other government entities, have established separate programs aimed at encouraging consolidation in the rural and cooperative banking sectors.

Under the “Strengthening Program for Rural Banks” (SPRB) and the “Strengthening Programs for Cooperative Banks” (SPCB), the central bank grants regulatory incentives to well performing industry players that will acquire those that are faced with capitalization problems.

Moreover, potential white knights may be given financial assistance, such as in the form of loans, in their move to acquire other banks.