Philippine Banks See Rise in July Bad Loan Ratio Amid Lingering Strain of High Borrowing Costs and Inflation

MANILA, Philippines — The share of bad loans held by Philippine banks edged higher in July as some households and businesses continue to feel the strain of high borrowing costs and elevated inflation. Preliminary data from the Bangko Sentral ng Pilipinas (BSP) showed the banking industry’s non-performing loan (NPL) ratio climbed to a two-month high of 3.35 percent in July from 3.29 percent in June, although it remained below the 3.4 percent recorded a year ago. NPLs are loans whose principal or interest payments have remained unpaid for at least 90 days after their due date. A higher ratio means a larger share of banks’ total loans is considered problematic, which can signal greater repayment stress among households and businesses. In peso terms, gross bad loans increased by 9.3 percent to P585.08 billion in July from P535.45 billion a year earlier. However, banks’ gross loan portfolio grew at a faster annual pace of 10.6 percent to P17.45 trillion from P15.77 trillion. This helped keep the NPL ratio below its year-ago level despite the increase in soured loans. The month-on-month picture was different. Gross loans declined by 1.9 percent from P17.78 trillion in June, while NPLs were virtually unchanged at around P585 billion. With a smaller pool of total loans, bad loans accounted for a slightly larger share of the industry’s loan book. Jonathan Ravelas, senior adviser at Reyes Tacandong & Co., said the increase also reflected lingering financial pressure on certain borrowers following a prolonged period of costly credit and elevated inflation. “While the economy continues to grow, not all sectors and borrowers are recovering at the same pace, which is affecting repayment capacity in certain segments,” Ravelas said. Ravelas also noted that some increase in problem loans is expected as banks extend more credit. “As bank lending expands, a modest rise in NPLs is a normal part of the credit cycle,” he said. Past due loans, or obligations with missed payments that have not been classified as non-performing, rose by 7.4 percent to P738.77 billion in July from P687.59 billion a year ago. Still, the past due loan ratio improved to 4.23 percent from 4.36 percent. Restructured loans, which involve accounts whose payment terms have been modified to help borrowers manage their obligations, increased by 3.7 percent to P341.95 billion from P329.64 billion. The restructured loan ratio stood at 1.96 percent, lower than 2.09 percent in July last year. Banks also continued to maintain buffers against potential loan losses as allowance for credit losses increased by 5.6 percent to P540.9 billion from P512.06 billion. The NPL coverage ratio, which shows how much of banks’ bad loans could be covered by loan-loss reserves, stood at 92.45 percent in July. This was lower than 95.63 percent a year earlier and broadly steady from 92.52 percent in June. Despite pockets of stress, Ravelas said the latest figures do not indicate a broader problem for the financial system. “Philippine banks remain well-capitalized and adequately provisioned, while the NPL ratio remains manageable by historical standards,” he said. “Moving forward, the key will be continued economic growth, easing inflation, lower interest rates and prudent credit risk management to help improve borrowers’ debt-servicing capacity,” Ravelas said.