Banks reduce exposure to bad debts, have more cash to loan out—BSP

MANILA, Philippines—Universal and commercial banks continued to cut their exposure to bad debts in January, a move that made it comfortable for the financial institutions to extend much more credit to the public.

Regulators said the observance of prudent credit standards of banks, as shown by the continuing decline in soured loans, has given banks flexibility to lend more and help boost economic growth.

The non-performing loans (NPL) ratio of universal and commercial banks averaged at 2.35 percent by the end of January, falling from the 3.01 percent registered as of the same period of 2011, data from the Bangko Sentral ng Pilipinas showed.

NPL is the proportion of bad debts to the outstanding loans of banks. Loans are described as “bad” or “non-performing” if these remain unpaid at least 30 days upon maturity.

The latest ratio came about as the total loan portfolio of banks grew by 15 percent to P3.12 trillion by the end of January from P2.71 trillion a year ago, and as bad debts fell by 10 percent to P73.2 billion from P81.38 billion over the same period.

The NPL ratio started to fall into the 2-percent territory in the latter months of 2011, thereby reaching levels comparable to those seen prior to the Asian financial crisis of the late 1990s, on the back of credit practices of banks that regulators consider wise.

They said the comfortable level of exposure to bad debts, together with sufficient capitalization, is one indication the country’s banking sector remains sound.

The BSP said capitalization of banks would be sufficient enough to shield them from credit default risks.

“The industry’s provisioning against potential credit losses remained adequate,” the central bank said in a statement.

Loan-loss reserves of banks stood more than their non-performing loans by the end of January, with the NPL coverage ratio hitting 124.73 percent. This was better than the 117.47 percent registered in the same period of the previous year.

Meanwhile, the banks’ nonperforming assets (NPAs) ratio – the proportion to total assets of bad debts plus properties acquired from defaulting borrowers – improved as well, the BSP said, as it dropped to 2.83 percent in end-January from 3.42 percent a year ago.

The BSP said the exposure of banks to bad debts would remain within a comfortable level this year, as the growing liquidity of banks would prompt them to lend more and as improving income levels would allow borrowers to service their obligations on time.