THE local banking system may have to deal with a potential increase in nonperforming loans (NPL) as the Philippine economy stands on the edge of a recession amid the coronavirus disease 2019 (Covid-19) pandemic.
According to RCBC chief economist Michael L. Ricafort, the possibility of recession could heighten market volatility, taking a toll on the borrowers’ ability to pay loans. “Risk of recession could lead to some increase in market volatility as well as some possible increase in NPLs,” he said.
Analysts have been worrying that the enhanced community quarantine in Luzon—which was recently extended up to April 30—will continue to constrict activities and induce financial stress into the economy, affecting its growth.
The National Economic and Development Authority (Neda) said its initial estimates for the country’s economic growth this year range from -0.6 percent to 4.3 percent, but this is still subject to change depending on the developments over the pandemic. Before, the target band for 2020 was set at 6.5 percent to 7.5 percent.
The Bangko Sentral ng Pilipinas (BSP), meanwhile, noted that gross NPL of the local bank industry stood at P239.08 billion in February, higher than P234.99 billion a month earlier.
Financial challenge
ING Bank Manila economist Nicholas Mapa said that cash-strapped firms with debt are currently facing financial challenges amid the pandemic, forcing them to downsize operations, sell assets and even default on loans.
“If borrowers are unable to repay, this puts banks’ cash flows under stress and they too may need to write off loans and may eventually need to seek help from the BSP,” Mapa added.
Moody’s Investor Service recently reported that the global speculative-grade default rate registered at 3.5 percent last month, higher from 3.2 percent in February and 2.1 percent a year ago for the same period.
Aiding the economy
Axiory Global Ltd. Director of Research and Education Tomasz Wisniewski said that the banking sector should try to keep it together in the face of a recession as financial institutions filing for bankruptcy would create a spillover to other industries as well.
Wisniewski added that banks should make money accessibility easy to support liquidity, cash for operations, credit and spending, among others.
To help the country in the economic slump, UnionBank chief economist Ruben Carlo O. Asuncion said the banks should just remain operational to serve the needs of their customers.
“Optics matter. Maximize their digital advantage to help people to continue their banking activities online,” he said.
Mapa said the banks could also extend terms of the existing loans to help borrowers as they cope with cash-flow problems. The government could also establish a loan program to support the liquidity of firms and corporations, he added.
“If they [banks] force borrowers to pay on time, they may risk the entire system crashing with the downturn becoming more severe,” Mapa added.
Further cut
Ricafort said the Central Bank could still cut the policy rates and reserve requirement ratio (RRR) to boost lending and stimulate business and economic activities.
BSP had eased policy rates earlier—the right move, said Asuncion, given that further support was needed by the financial system during the pandemic.
“Liquidity is key during these unusual times. People need to have access to their money and that money should freely flow with various transactions,” he added.
The Central Bank slashed RRR on reservable liabilities of universal and commercial banks by 200 basis points (bp) to 12 percent. This is anticipated to release around P180 billion worth of liquidity into the banking system.
The Monetary Board has also reduced BSP’s overnight reverse repurchase facility by a total of 75 bp to 3.25 percent. Another monetary policy meeting is set on May 21.