The regulatory relief recently announced by monetary authorities is essential; it stabilizes borrowers’ loan repayment schedules and prevents a sharp uptick in banks' non-performing loans (NPLs).

This regulatory respite is a necessary support mechanism that helps stabilize banks’ balance sheets amidst looming defaults triggered by business slowdowns and skyrocketing energy costs.

Yes, Virginia, managing inflation and energy-related disruptions is front and center of this relief. It is focused and aimed at specific, declared affected areas and industries, such as the agricultural sector.

By comparison, these measures are not on par with the universal relief provided during the pandemic under the Bayanihan laws, which included mandatory loan repayment deferrals for all borrowers.

Basically, this regulatory relief could be viewed as an order from the Bangko Sentral ng Pilipinas (BSP) for banks and financial institutions to absorb some of the borrowers’”financial pain. However, the absorptive capacity of these institutions depends largely on their individual standing or industry classification.

While the industry welcomes the relief, the latest word from the banking corridors is that the Chamber of Thrift Banks (CTB) may seek a standalone relief measure for its 54 members and 1,200 branches nationwide.

The CTB leadership plans to request that the BSP temporarily reduce the Minimum Liquidity Ratio (MLR) for its members and cooperative banks to beef up their liquidity positions.

As a financial matrix, the MLR is a mandatory buffer ensuring that banks and financial institutions hold enough liquid assets to withstand potential shocks.

The plan is to request a reduction in the MLR to 16 percent from the current 20 percent—a move the monetary authorities previously granted alongside interest rate cuts to cushion the financial stress of the pandemic.

While this may not sit well with their "big brothers"—the universal and commercial banks with massive capital bases—temporarily lowering the MLR for CTB members will soften the impact of potential loan defaults, particularly for those operating in the countryside.

The financial system remains under “continuing stress.” It began with the floodgate scandal, which caused government agencies to defer settlement of obligations to contractors and suppliers. This, in turn, prevented those businesses from meeting their repayment schedules with banks.

One industry player shared that a number of government agencies have failed to meet their outstanding payables since the floodgate mess erupted in August last year.

As a result, NPL levels at some banks have started climbing. As the source put it: “Contractors and suppliers with bank lines are still unable to pay up.”

This is the same path the BSP took at the height of the pandemic. To prevent the domestic economy from reaching a virtual standstill, authorities reduced the MLR for smaller financial institutions and cut the Reserve Requirement Ratio (RRR) for large banks to ensure sufficient liquidity.

The lowered MLR, part of that broader relief package, prevented financial constraints for smaller banks. Data showed these measures effectively injected over ₱1.9 trillion in liquidity into the system—approximately 9.6 percent of the country’s 2019 nominal gross domestic product.

Looking back, the sector remained well-capitalized enough to withstand the pandemic shock, even amidst a 32.8 percent year-on-year drop in overall banking net profits for 2020.

Let’s see how this plays out.