Banks’ strong risk governance played a crucial role in its ability to manage bad loans which has seen a declining trend, according to a central bank official.
Bangko Sentral ng Pilipinas (BSP) Deputy Governor Chuchi G. Fonacier said simulations done by the BSP indicated a non-performing loan (NPL) ratio of five to six percent by end-2021 but as of November, the ratio has dropped to 4.35 percent, the third month in a row that it has decreased.
“The BSP calibrates internal simulations as more data become available to ensure that these consider latest developments,” said Fonacier in an email to Manila Bulletin. “The BSP will likewise continue to monitor the operations and economic activities of households and businesses, and their demand for credit,” she added.
Based on BSP’s NPL projections for 2021, the ratio could settle between five and six percent using simulations under three different scenarios: “low”, ”moderate”, and “extreme”. The central bank’s maximum NPL estimates are conservative estimates using the 1997-1998 Asian Financial Crisis as base experience.
Fonacier explained that the scenarios “do not consider the sound financial position as well as strong risk governance of banks coming into the COVID-19 crisis.” It has also not factored in BSP’s prudential policy reforms over the years to promote prudent risk- taking behavior, including sound credit risk management in banks, she said.
Also, Fonacier said projections under the “extreme” scenario have not considered the impact of BSP’s extraordinary relief measures which has “eased various prudential requirements for purposes of incentivizing banks to grant equivalent financial relief to borrowers and to continue lending to vulnerable segments of society.”
“These measures provide banks with flexibility in managing their operations and the financial capacity to tailor-fit loan terms of affected borrowers based on their projected cash flow to increase the probability of loan collection,” said Fonacier.
Banks’ NPL ratio continued to fall in November 2021 at 4.35 percent from October’s 4.42 percent. The last time the ratio was at the 4.35 percent level was April 2021.
Based on BSP data, the NPL ratio first climbed to the four-percent level in February last year when it increased to 4.08 percent from 3.72 percent in January. It has steadily increased until it reached its peak of 4.51 percent in July and in August, before dropping to 4.44 percent and then 4.42 percent in September and October.
Total NPLs which are unpaid and impaired loan accounts for more than 30 days, reached P481.88 billion in November, down from P483.98 billion in October.
Meantime, banks’ NPL coverage ratio also improved to 87.13 percent in November compared to 85.41 percent in October. Banks continue to provide adequate loan loss provisioning. The allowance for credit losses amounted to P419.86 billion in November from P413.37 billion in October.
BSP’s simulations earlier pointed to a possible peak of 8.2 percent in NPL ratio for this year. However, the central bank said NPL ratio will continue to be manageable due to local banks’ prudent credit risk management standards and the operationalization of the Financial Institutions Strategic Transfer (FIST) Act which will help banks dispose of its non-performing assets. The FIST law will also reduce NPL ratio by about 0.6 to 5.8 percentage points.