MANILA, Philippines — Multilateral lender International Monetary Fund (IMF) said the asset quality deterioration of Philippine banks has not yet peaked as the country continues to grapple with the pandemic.
In a virtual forum organized by the Philippine Economic Society, IMF resident representative to the Philippines Yongzheng Yang said the non-performing loans (NPLs) of banks operating in the country may rise further in the coming months.
“We are not yet seeing probably the peaks of the asset quality deterioration. We expect NPLs to rise, although the present figures are better and certainly much lower than what we saw during the Asian financial crisis,” Yang said.
Latest data from the Bangko Sentral ng Pilipinas (BSP) showed the soured loans of the banking sector surged by 73.8 percent to P482.99 billion in June from P277.81 billion a year ago.
Despite the surge, the gross NPL ratio of Philippine banks was almost unchanged at 4.48 percent in June from 4.49 percent in May as the industry’s total loan book slipped by only 0.4 percent to P10.77 trillion from P10.82 trillion.
Past due loans, referring to all types of loans left unsettled beyond payment date, jumped by 51.3 percent to P577 billion from P381.43 billion for a past due ratio of 5.36 percent.
Likewise, the industry’s restructured loans amounted to P328.65 billion in June or 6.7 times the P48.67 billion last year, translating to a restructured loan ratio of 3.05 percent.
Yang stressed the importance of adequate credit provision to preserve the financial health of the Philippine banking sector.
In anticipation of rising defaults due to the impact of the pandemic-induced recession, the industry’s allowance for credit losses increased by 31.3 percent to P397.79 billion in June from P302.93 billion in the same month last year.
Yang said banks would likely remain risk averse for some time due to uncertainties brought about by the pandemic.
“With the asset quality aspect deteriorating, we are not seeing the banks ready to lend. They are pretty risk averse right now. So this is a challenge right now,” he said.
Aside from the credit guarantee program, Yang said the BSP should take advantage of the implementation of Republic Act 11523 or the Financial Institutions Strategic Transfer (FIST) Act, as well as the proposed Government Financial Institutions Unified Initiatives to Distressed Enterprises for Economic Recovery (GUIDE) bill.
BSP Governor Benjamin Diokno earlier said the industry’s NPL ratio is seen exceeding six percent this year, but the FIST Law would help banks offload P152 billion worth of bad assets, reducing the NPL ratio by 0.63 to 0.71 percentage points.
During the recently concluded Article IV Consultations with the Philippines, the IMF highlighted that adequate credit provisioning and measures to strengthen prudential supervision remain important to preserve banking system soundness.
The multilateral lender also recommended that regulatory forbearance be allowed to expire as scheduled, and generally saw merit in limiting dividend payouts to allow for capital retention when needed.
As part of its COVID-19 response measures, the BSP implemented various measures, including time-bound regulatory relief and forbearance measures, though the scale of loan moratoria and credit guarantees has been relatively limited.
The measures also allow banks to provision over a maximum period of five years subject to the approval of the BSP.
Instead, the IMF said the regulator should continue to use the flexibility of the tools available in the accounting and Basel capital framework, as well as further develop and use macroprudential tools and buffers.
It said the preceding forbearance measures could undermine their effectiveness by reducing bank capital’s sensitivity to risks as delay keeps bank capital at artificially high levels.