Fitch Ratings wary of rising unsecured loans in PH
The growing share of unsecured consumer lending in banks’ loan portfolio might add to risks in the Philippine banking system, if the strong economic growth that supported household appetite to borrow falters, according to Fitch Ratings.
The global credit watchdog said in a research note that consumer lending revved up strongly amid economic reopening through 2022, with the momentum carrying over to this year with a hefty growth rate of 25.7 percent in February.
At the same time, faster growth was seen in riskier unsecured segments such as credit cards (29.4 percent) and salary-backed general consumption loans (68.8 percent).
This was in contrast to slower growth in residential mortgage lending amid higher interest rates.
Fitch Ratings said these developments reflected a release of pent-up demand in the wake of the COVID-19 pandemic, as well as strong fundamental demand from a growing population with rising incomes.
“Some households may also be leveraging up to offset the effects of high inflation on the cost of living, potentially stretching their repayment capabilities,” the company said.
“Banks’ appetites to take on greater risk exposure have also increased amid robust economic growth, to boost profitability after facing headwinds in recent years,” it added.
The result is that the share of unsecured consumer loans rose to about 7 percent in December 2022 from 5 percent in December 2017.
Fitch Ratings expects this share to continue to rise gradually—to within the range of 10 percent to 12 percent over the next five to six years—but also sees the likelihood of near-term growth rates remaining high.
The company said that consumer loans, while comprising a small share of total loans, are inherently more vulnerable to asset-quality problems in the event of economic downturns, as consumers generally have thinner financial buffers than larger corporate borrowers.
“The growing share of riskier consumer lending could thus add to systemic risks unless it is offset by other factors, particularly as potential defaults in the dominant corporate-lending segment may be lumpy and correlated with increased consumer-loan defaults,” Fitch Ratings said.
Also, lending yields for credit cards and personal loans are significantly higher than delinquency rates.
And yet, the recent lifting of credit card rate caps has enabled banks to tolerate higher charge-off rates, and they have therefore become more willing to increase exposures.
“Still, the volatility of nonperforming loans in the consumer-loan segment during the pandemic indicates some weakness in underwriting standards, and that such lending remains particularly vulnerable to stress,” Fitch Ratings said.
Last March, ING Bank senior economist Nicholas Mapa said that the impact of rising interest rates due to monetary tightening might start to be seen this year. Mapa said salary-based loans and consumer credit were quite active throughout the pandemic as incomes were constrained by lockdowns, a trend that was sustained late last year as households needed a lifeline to offset skyrocketing prices.
Miguel Chanco, chief economist on emerging Asian markets at Pantheon Macroeconomics, said the overall surge in consumer debt was unsustainable, especially in an environment of rising interest rates.
“This increasing reliance on borrowing arguably is more a sign of weakness in household balance sheets, as people seemingly are having to rely more on loans in the face of intense cost of living pressures and the lingering damage of the pandemic to household savings,” Chanco said. INQ