Banks’ bad debts declined in June

Bad debts held by Philippine banks eased in June but stayed above prepandemic levels as high interest rates continued to weigh on borrowers’ ability to pay their debts.

Latest data from the Bangko Sentral ng Pilipinas (BSP) showed 3.51 percent of banks’ total loan portfolio in June was considered nonperforming, or more than 90 days late on a payment and at risk of default. That was lower than the gross nonperforming loan (NPL) ratio of 3.57 percent recorded in May.

This means that, in peso terms, P502.4 billion of banks’ P14.3-trillion loan book had turned sour in June. That amount of bad debts was 14.8-percent larger compared with a year ago.

READ: High rates bite; bad bank loans surge

Overall, the NPL ratio was still above the prepandemic level of 2.04 percent recorded in 2019, as borrowing costs remain high after the BSP aggressively hiked its policy rate to tame stubbornly high inflation.

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.

And rates might stay expensive for a longer period after BSP Governor Eli Remolona Jr. struck a less dovish tone earlier this week and said a rate cut at the Aug. 15 policy meeting of the Monetary Board was “a little less likely” because the July inflation reading turned out “slightly worse than expected.”

Distortions

Data showed inflation quickened to 4.4 percent in July, breaching the BSP’s 2 to 4 percent target range for the first time this year partly due to distortions from base effects.

To prevent unpaid loans from tarnishing their balance sheets, figures showed banks set aside P479.4 billion of their capital to cover potential credit losses in June. That yielded an NPL coverage ratio—a measure of sufficiency of such buffer funds—of 95.41 percent, a tad lower than the 95.81 percent recorded in May.

As the bad debts ratio eased in June, BSP data also showed restructured loans, or credit subject to negotiations with struggling borrowers, cornered 2.05 percent of lenders’ total loan book, down from the 2.13-percent ratio in the previous month.

Meanwhile, nonperforming assets like foreclosed properties amounted to P638.9 billion, up by 1.2 percent month-on-month. Including restructured loans, cumulative distressed assets accounted for 5.65 percent of banks’ total loan portfolio in June, easing from the 5.78 percent ratio posted in the previous month.