The Bangko Sentral ng Pilipinas (BSP) is ready to dispense with emergency liquidity to "problematic" local banks when needed amid an environment of rising corporate debt, but there is no need for such at the moment, according to its highest-ranking official.

BSP Governor Eli M. Remolona Jr. issued this assurance on Wednesday, Oct. 11, after stating the risks and challenges of the banking sector on the back of increased private sector debt and high interest rates. But, he strongly reiterated that the Philippine financial system with the banking sector at its core, remains stable and resilient -- before and after the pandemic.

“We’re making sure (that) should there be a need for emergency liquidity by the banks, we will be in a position to provide the emergency liquidity although we don’t see any need at the moment,” he told reporters during BSP’s first “Good Mornings with Gov Eli” press chat on Wednesday.

The BSP can grant emergency loan facilities for solvent banks that have “serious” liquidity problems. The recent amendment to the Philippine Deposit Insurance Corp. charter has also given the BSP enhanced resolution authority.

Capital-deficient banks are placed under the central bank’s “ICU” or the prompt corrective action to help them recover and get back on their feet. Failing to do so after two years of recovery mode will lead to closure.

For now, Remolona said there are some "risks" that they are closely monitoring.

“(We’re) watching very carefully, not the banks themselves, but major corporations that have somewhat elevated debt, leverage among major corporations … it's somewhat high. So there are some risks that some of them will not be able to meet (or) pay off their loans,” he said.

But Remolona added that “so far it’s very manageable but it's something we’re watching.”

The BSP is monitoring the interrelationship between firms in a conglomerate structure as this set up is usually vulnerable to a possible contagion which happens if a company or entity with financial problems will affect other firms within the conglomerate group.

Meanwhile, the International Monetary Fund (IMF) has been cautioning the region to scrutinize the rising level of corporate debt as interest rates increase some more. Not just the private sector, but also the public sector or government borrowing has been flagged by the IMF as well.

The IMF said the “highly leveraged” corporations have a greater risk of default “as monetary policies and financial conditions remain tight”. And “even with resilient economic growth, interest payments may exceed earnings as borrowing costs rise, reducing firms’ ability to service their debts,” said the IMF.

In an Oct. 3 report of the IMF’s concluded 2023 Article IV Mission to the Philippines, where it also cut its growth forecast for the country to 5.3 percent from its previous estimate of 6.2 percent, it noted that the local banking sector is well-capitalized and liquid, “but pockets of vulnerability remain in the corporate sector.”

“The higher interest rate environment underscores the importance of strengthening systemic risk monitoring and financial supervision, expanding the macroprudential toolkit, as well as calibrating it to counter vulnerabilities stemming from sectoral exposures and linkages between financial conglomerates and non-financial corporates,” said IMF Mission Head Jayanath Peiris.