Bad debts held by banks rose to their highest level in over two years in July, as many borrowers continued to struggle to pay their loans amid a high interest rate environment.
Latest data from the Bangko Sentral ng Pilipinas (BSP) showed 3.58 percent of the total loan portfolio of the local banking sector was already considered nonperforming, or 90 days late on a payment and at risk of default.
That figure—called the gross nonperforming loans (NPL) ratio—was higher than the 3.51 percent ratio recorded in the preceding month. The July NPL ratio was also the highest reading since June 2022.
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This means that, in peso terms, P508.1 billion out of the P14.2-trillion loan portfolio of the Philippine banking system had turned sour in July. That amount of bad debts was 15 percent larger compared with a year ago, figures showed.
To protect their balance sheets from unpaid loans, banks had set aside P479.2 billion of their capital as allowance for credit losses. This brought the banking sector’s NPL coverage ratio—a measure of sufficiency of the buffer funds—to 94.32 percent in July.
“We know that there has been a financially restrictive environment for quite some time now, and this NPL uptick could be a direct result as the BSP tries to stunt economic activity amidst high prices in almost two years,” said Ruben Carlo Asuncion, chief economist at Union Bank of the Philippines.
“With high interest rates, both consumers and firms find it expensive to refinance debt and end up failing obligations eventually,” Asuncion added.
To tame stubbornly-high inflation, the BSP had raised its policy rate by a total of 450 basis points (bps) to an over 17-year high of 6.5 percent, among the most aggressive in Asia.
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Banks use the BSP’s benchmark rate as a guide when charging interest rates on loans. By making borrowing costs more expensive, the BSP had wanted to temper strong demand for commodities with limited supply. This, in effect, tamed inflation.
Moving forward, UnionBank’s Asuncion said NPLs are projected to decline as the central bank started to unwind its previous tightening actions. Last month, the policy-making Monetary Board slashed the key rate of the BSP by 25 bps to 6.25 percent, the first central bank in Southeast Asia to kick off an easing cycle.
“This (high NPL) does not spell doom for the financial system, of course. It is a phase that is expected and may consequently recover as monetary policy rates normalize,” Asuncion said.