Philippine banks’ bad loan ratio improved to 3.29 percent as of end-March, marking a three-month low as lending growth accelerated at a faster pace than the increase in soured loans.

The latest Bangko Sentral ng Pilipinas (BSP) data showed that the banking industry’s gross non-performing loan (NPL) ratio narrowed in March from 3.33 percent in February and 3.31 percent in January.

March’s bad loan ratio was the lowest since the 3.07 percent recorded in December 2025. Bad loans last March likewise stood below the 2025 peak of 3.5 percent reached in August.

At end-March, the value of gross NPLs increased by approximately 2.7 percent to ₱568.6 billion from ₱553.7 billion last February. Year-on-year, soured loans grew by 10.2 percent from ₱516.1 billion in March 2025.

Loans are classified as non-performing if they remain unpaid for at least 90 days past the due date, representing a credit risk as the likelihood of repayment diminishes.

At the end of the first quarter, the Philippine banking system’s total loan book swelled by nearly four percent to ₱17.26 trillion from ₱16.6 trillion in February. Compared with the same period in 2025, the total loan portfolio grew by more than 10 percent from ₱15.63 trillion.

Past-due loans rose by 2.9 percent to ₱736.2 billion in March from ₱715.7 billion last February. They also increased by 13.9 percent from the ₱646.4 billion recorded in March last year.

Despite the increase in volume, the past-due ratio improved to 4.26 percent at the end of the first quarter, down from 4.31 percent in February and 4.28 percent last January. This ratio was higher than the 4.14 percent seen in March 2025.

Past-due loans refer to accounts where the borrower has failed to pay the principal, interest, or any other amount due on the scheduled date.

Rizal Commercial Banking Corp. (RCBC) chief economist Michael Ricafort said the lower bad loan ratio may have been largely driven by faster loan growth, which expanded the base compared with the slower increase in NPLs.

Banks, he said, have also become more cautious in managing credit risk and have tightened lending standards amid geopolitical tensions involving Iran and the broader Middle East region as a precautionary measure.

“Faster growth in bank loans could be attributed to some frontloading of borrowing requirements as part of hedging requirements in terms of purchases and investments before inflation and lending rates go up further due to the Middle East war,” Ricafort added.

For the months ahead, however, Ricafort said the Philippine economy could moderate due to the ongoing war, which has increased pressure on prices and economic activity—“all of which could reduce the ability to pay for some borrowers and lead to higher NPLs and NPL ratios.”

Global debt watcher S&P Global Ratings likewise said earlier that domestic banks could face a potential surge in soured loans as tensions in the Middle East threaten to disrupt the domestic economy.