Banks’ bad debts spiked in Oct to over 2-yr high

INQUIRER FILE PHOTO

Soured loans held by local banks rose to their highest level in more than two years in October, as the start of the Bangko Sentral ng Pilipinas’ (BSP) rate cutting cycle might have prompted banks to chase higher yielding — but riskier — consumer credit.

The latest data from the BSP showed the gross amount of non-performing loan (NPL) — or credit that is 90 days late on a payment and at risk of default — cornered 3.60 percent of the total lending portfolio of the Philippine banking sector in October.

That figure, called the gross NPL ratio, was the highest since the 3.75 percent recorded in May 2022. It was also larger than the previous month’s ratio of 3.47 percent, data showed.

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In peso terms, this means P524.31 billion out of the P14.55-trillion loan book of the entire local banking industry as of October had soured. That amount of NPLs was 16.66 percent higher compared with a year ago.

As it is, the proportion of bad debts held by banks has yet to return to the prepandemic level of 2.04 percent recorded at the end of 2019.

Leonardo Lanzona, economist at Ateneo De Manila University, said the higher NPL ratio in October might have been a result of banks’ “aggressive” lending strategy amid the ongoing easing cycle of the BSP, which potentially increased their exposure to “risky” borrowers.

”As interest in loans became cheaper, lenders may have provided loans without robust risk assessments, thus resulting in lending to borrowers with low creditworthiness,” he said.

At present, the benchmark rate that banks typically use as a guide when charging interest on loans stood at 6 percent following two quarter-point cuts each at the last August and October meetings of the Monetary Board. And a third reduction is likely on the table this month after the economy posted weaker-than-expected growth in the third quarter.

But beyond the rate cuts, Lanzona also said the powerful typhoons that hit the country in October and affected livelihoods might have made debt servicing more difficult for some borrowers.

To shield their balance sheets from credit losses, BSP figures showed banks set aside P487.52 billion as a provision for unpaid loans in October. That brought the NPL coverage ratio — a measure of the sufficiency of such buffer funds — at 92.98 percent, albeit lower than the 93.31 percent recorded in September.