Bad debts held by banks rose to their highest level in almost two years in May as high interest rates continued to make debt payments more expensive for many borrowers.
Latest data from the Bangko Sentral ng Pilipinas (BSP) showed that 3.57 percent of the banking industry’s total loan portfolio were already nonperforming, or more than 90 days late on a payment and at risk of default. In peso terms, P495.7 billion of the industry’s total loan book of P13.9 trillion had turned sour. That amount of nonperforming loans (NPLs) was 14 percent larger compared with a year ago, figures showed.
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As it is, the NPL ratio in May surpassed the 3.45 percent recorded in April, and was the highest since June 2022. At the same time, the NPL ratio moved away from the prepandemic level of 2.04 percent recorded in 2019.
To protect their balance sheet from the rise in unpaid loans, banks set aside P474.9 billion as allowance for credit losses in May. That yielded an NPL coverage ratio—a measure of sufficiency of such buffer funds—of 95.81 percent.
BSP data also showed restructured loans, or credit subject to negotiations with struggling borrowers, accounted for 2.13 percent of banks’ entire loan book in May, higher than the previous month’s ratio of 2.08 percent.
Beyond loans, nonperforming assets like foreclosed properties surged 12.2 percent year-on-year to P631.2 billion.
Cid Terosa, senior economist at University of Asia and the Pacific, said the continued increase in bad debts was still due to the high interest rate environment meant to tame inflation.
“Borrowing costs have effectively curtailed loan payment among individuals, businesses and investors,” Terosa said.
READ: Digital banks’ bad loans eased to three-month low in April
The BSP’s benchmark rate—which banks typically use as a guide when charging interest rates on loans—is currently at 6.5 percent, the highest in over 17 years. By keeping borrowing costs high, the central bank wants to bring demand for key consumer items in line with limited supply to prevent a fast rise in prices.
Last week, Governor Eli Remolona Jr. struck a more dovish tone and said there’s a chance that the central bank might cut the policy rate by a total of 50 basis points (bps) this year—with the first 25-bp cut possibly in August and ahead of the US Federal Reserve.
What fueled Remolona’s dovishness was his expectation of a slower inflation rate in the coming months, thanks to the Marcos administration’s decision to further slash tariffs on rice, a major food staple of Filipinos.
Moving forward, Terosa said future rate cuts at home and in the US could temper the increase in NPLs.