BSP sees above 6% NPL ratio

Published May 24, 2021, 4:51 PM

by Lee C. Chipongian

Banks’ non-performing loan (NPL) ratio will breach six percent by the end of 2021, according to Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno.

NPL ratio which is currently at 4.21 percent end-March, while still considered manageable, is expected to “settle at slightly above six percent by end-December 2021,” said Diokno. He said this estimate is consistent with its most recent survey of banks’ outlook for the year which remains to be stable.

BSP Governor Benjamin E. Diokno (Credit: BSP photo)

“As considerable economic uncertainty remains, the BSP continues to monitor relevant risks and vulnerabilities arising from banks’ activities through enhanced surveillance mechanism,” Diokno told bankers attending the recent virtual convention of the Bankers Institute of the Philippines.

In managing the rise in NPLs, he cited the operationalization of the Financial Institutions Strategic Transfer or FIST Act which will manage banks’ NPL through the transfer or sale of banks’ non-performing assets (NPA) to FIST Corporations, Special Purpose Vehicles and eligible individuals. 

With the FIST Act, Diokno said the financial system can withstand the risks and challenges of the COVID-19 pandemic.

Diokno’s latest estimate of an above six percent NPL ratio echoed an industry survey as well as credit watchers’ expectation that NPL ratio will breach six percent because of the two 2020 Bayanihan laws and borrowers’ difficulty in meeting their obligations. With the FIST Act though, the BSP expects about 30 percent of total NPAs will be freed under the law. NPL ratio is also expected to decrease by 0.63 to 0.71 percentage points within two years of the FIST implementation.

“The BSP expects the banking system to remain stable with adequate capital and liquidity buffers to support the financing requirements of their clients,” stressed Diokno. “The impact of the pandemic on the overall condition and performance of the banking system has been manageable. This was largely due to the calibrated fiscal and prudential initiatives to address the impact of the pandemic as reinforced by the BSP’s timely implementation of time-bound and crucial regulatory relief measures in the first half of 2020,” he added.

The BSP regularly conducts various stress test exercises and simulations to monitor and assess the banking system’s resiliency versus the pandemic. “Overall, the results reinforce that the banking system is reasonably well-capitalized and could continue lending to support the economy. However, the current challenges in the financial performance of the hardest-hit sectors and highly vulnerable banks warrant closer coordination and monitoring to ensure the banking system’s financial stability and continuing resilience,” said Diokno.

In the same virtual event, the BSP chief said banks have additional leeway in managing any capital and liquidity issues following the Basel Committee on Banking Supervision or the BCBS’s deferral of the implementation date of Basel standards by one year to January 1, 2023. 

“Such deferral provided both banks and regulators with some space and flexibility to devote their available resources for essential operations in responding to the impact of the global pandemic,” said Diokno.

Amid the pandemic, the BSP has granted both banks and quasi-banks reprieve in the implementation of Basel standards by allowing them to utilize the built-up capital conservation buffer and liquidity coverage ratio buffer during the COVID-19 crisis, said Diokno.

“This move is consistent with the BCBS’ pronouncement that a measured drawdown of the buffers in order to absorb losses and liquidity-related shocks, as well as to support the real economy should be deemed appropriate during periods of stress,” he explained. The implementation of Basel III standards for smaller banks such as stand-alone thrift banks, rural banks and cooperative banks were also deferred to January 1, 2023 where the minimum liquidity ratio was temporarily reduced. “(This will) enable these banks to continue to support their rural community-based operations and to respond to the crisis,” said Diokno.