No massive loan defaults in PH despite economic slump, BSP assures

MANILA, Philippines—Loan defaults in the local banking system have remained relatively low despite the massive economic disruption caused by the COVID-19 pandemic, the head of the central bank told lawmakers on Wednesday (Sept. 8).

In a statement delivered before the Senate Committee on Finance, Bangko Sentral ng Pilipinas (BSP) Governor Benajmin Diokno said the gross nonperforming loan ratio of Philippine banks increased to 4.5 percent while the bad loan coverage ratio of the banking system—representing the amount of cash set aside by financial institutions as a buffer for defaults—declined to 82.4 percent in June.

“On the whole, Philippine banks have continued to rein in the nonperforming loan ratio within manageable level, reflecting gains from prudent reforms and improvements in banks’ credit
risk management systems,” he said.

Moving forward, Diokno said that the regulator does not see the local banking system experiencing massive defaults by borrowers due to adverse business conditions resulting from proactive measures taken by the industry.

“The existing regulatory relief measures serve as an interim measure pending the full operationalization of the FIST Act in 2021,” he said, referring to the Financial Institutions Strategic Transfer law which will make it cheaper for banks to unburden themselves of bad loans to buyers who will assume the risk of collection.

“The FIST Act will reinforce banks’ capital and liquidity position in the long-term by allowing financial institutions to dispose their non-performing assets, increase their risk-bearing capacity, and enhance their capability to provide financial services to productive sectors of the economy,” Diokno said.

The country’s top financial regulator also noted that Philippine banks remain well-capitalized.

As of the first quarter of 2021, the capital adequacy ratio of the banking system stood at 16.9 percent, well above the 10 percent minimum threshold set by the BSP.

“The BSP stands committed and ready with its enhanced onsite and off-site surveillance tools and prudential policy toolkit to promote the financial sector reform agenda for sustaining the sound and stable financial system conducive to a strong, dynamic and inclusive economic growth recovery of the country,” Diokno said.

TSB