Banks trim bad debt exposure

Universal and commercial banks trimmed their exposure to bad debts to a record low since the Asian financial crisis, the Bangko Sentral ng Pilipinas has reported.

Industry players said this development was brought about by the banks’ adherence to proper lending standards, which helped them ensure collections of loan payments.

The non-performing loans (NPL) ratio of universal and commercial banks dropped to 2.23 percent in December—the lowest since the financial crisis struck in the 1990s, pulling down Southeast Asian economies, the BSP said.

The latest NPL ratio was lower than the 2.39 percent reported in September, and the 2.86 percent seen in December 2011.

In real terms, bad debts amounted to P71.94 billion in December 2011, down by 10 percent from the P80.22 billion reported in the same period the previous year.

The BSP explained that the amount of banks’ soured loans during the period declined, while their total loan portfolio increased, resulting in a drop in their NPL ratio—or the proportion of bad debts to the total loan portfolio of banks.

A loan is considered “bad” or “sour” if it remains unpaid at least 30 days upon maturity.

In the early 2000s, the amount of bad debts hit over 20 percent of banks’ total loan portfolio due to the crisis of the late 1990s, which led to a decline in loan repayment rate.

The BSP said the combined outstanding loans of banks reached P3.22 trillion as of end-December last year, up by 15 percent year on-year from P2.8 trillion.

Industry players said the rise in total loan portfolio of banks indicated that the institutions sustained their appetite for lending, helped up by rising liquidity and increasing demand for loans.

They pointed to the rising level of household income, partly supported by remittances from Filipinos working overseas, which gave consumers more confidence to purchase big-ticket items, such as vehicles and residential properties and automobiles.

Also, because of improving profitability, most businesses are now engaging in expansion initiatives funded by bank loans, industry members said.

The BSP said that capital provisioning for potential loan defaults also improved.

Reserves for potential loan losses as of end-December 2011 reached P90.9 billion—equivalent to 126 percent of total bad debts. In the same period the previous year, the NPL coverage ratio stood at only 118 percent.

“The industry’s provisioning against potential credit losses remained adequate,” the BSP said in its report.

According to regulators, banks are being urged to lend more to the public to further boost the economy.

BSP Deputy Governor Diwa Guinigundo said that although the amount of loans rose substantially last year, banks are still liquid enough to increase their lending activities.