Bad loans in the local banking system will likely peak next year before gradually returning to pre-pandemic levels, the Bangko Sentral ng Pilipinas (BSP) said.
BSP Governor Benjamin E. Diokno said Wednesday, Sept. 22, that non-performing loan (NPL) ratio is estimated to hit 8.2 percent in 2022, almost twice the end-July level of 4.51 percent.
“This level is significantly lower than that experienced by the banking system during the Asian Financial Crisis,” said Diokno during his weekly online press briefing.
In 1997, the financial crisis contagion led to NPL ratio peaking at a high of 18 percent. NPLs are unpaid and impaired loan accounts for more than 30 days.
Diokno is confident that the NPL ratio will remain at single-digit level owing to local banks’ prudent credit risk management standards and the operationalization of the Financial Institutions Strategic Transfer (FIST) Act.
FIST will help banks dispose of its non-performing assets and will also reduce NPL ratio.
He said a few banks have already expressed interests in disposing their NPAs under FIST Act.“We do not expect NPLs to reach levels that will result in banks reaching their minimum capital ratio,” said Diokno.
He added that banks are well-capitalized and based on results of the BSP internal stress test exercises, it showed that most banks will be able to absorb losses under scenarios of assumed credit impairment.
“Banks are proactive and (BSP prudent regulations) ensure that their credit risk are well managed,” said Diokno, referring to enhanced remedial management problem of credits and the recognition of loan loss provisions and the managing of capital losses.
As of end July this year, NPL ratio has risen to a new 13-year high of 4.51 percent, much higher than 2.70 percent in same period last year since borrowers are still struggling to meet their loan payments amid the still surging public health crisis.
The banking sector’s soured loans increased by 66.35 percent to P487.005 billion from P292.760 billion same time last year.
Diokno has said that he expects NPL ratio to increase above six percent by the end of this year. With the FIST Act, NPL ratio will be further reduced by 0.6 to 5.8 percentage points from 2021 to 2025.
The gross NPL ratio as of end-July was accompanied by high NPL coverage ratio of 82.4 percent, and this is within the BSP’s and banks’ projections for the year, said Diokno.
“We believe that loan quality will remain manageable as both BSP and the banks project the banking sector’s non-performing loan ratio to settle between five percent and six percent by end-December 2021,” he said.