THE Philippine banking industry may need to beef up protection against credit losses because nonperforming loans (NPLs) are seen rising to as much as over half a trillion pesos this year, the Bangko Sentral ng Pilipinas (BSP) said.
BSP Managing Director Lyn I. Javier, during the digital meeting of the Committee on Banks and Financial Intermediaries on Monday, said that bad loans could reach P556.6 billion this year due to the coronavirus disease 2019 (Covid-19) pandemic slowing down economic activities.
This is equivalent to 5 percent in NPL ratio—portion of NPL to total loans—which is more than double of what the banking sector has been dealing with in recent years.
It was still better, however, compared to 8.6 percent during the Asian financial crisis.
As of February this year, gross NPL ratio stood at 1.74 percent. The said figure has been below 2 percent for, at least, the last four years, according to BSP data.
Gross NPL, meanwhile, reached P172.38 billion in February. Last year, it was at P156.53 billion.
Javier added that the banking sector might not be able to recover 50 percent to 80 percent of the bad loans. This translates to losses of around P278.3 billion to P445.28 billion.
Still, the Central Bank has yet to conduct a base-line survey to further evaluate the actual impact of the pandemic.
“As we highlighted earlier, the NPL increases over time, so we may be able to capture the initial impact for the next six months. But we are expecting a progression on the level of NPL through the time,” she said.
Still, Javier gave assurances that banks are well-capitalized to shield the impact of the pandemic, noting that the industry’s risk-based capital adequacy ratio was at 15.4 percent in solo basis as of end-2019.
“The buffers appear sufficient to cover the initial impact of the Covid-19 pandemic on banks’ liquidity, asset quality and solvency,” she added. Loan loss reserves of the banking system stood at P181.14 billion as of end-February.
BAP estimates
Meanwhile, the Bankers Association of the Philippines (BAP) also shared its estimates of NPLs in the draft of House Bill (HB) 6622 or “The Philippine Financial Industry Resiliency Act.”
The group noted that NPLs may increase to approximately P240 billion to P300 billion in the coming months. BAP said that 50 percent to 80 percent, or P120 billion to P240 billion, is expected to be written off.
BAP President Cezar P. Consing, in the same meeting, lamented that borrowers’ liquidity is currently being tested by the pandemic, thus the anticipation of an increase in bad loans.
“The ability to pay is really hampered here. And that is why we expect NPLs to go up,” Consing said. “I think the objective of the banks is try to work with each of the clients because if it is a liquidity issue, that is where we could be helpful.”
And it is only expected to get worse, he said, as NPLs are seen to only peak by end of 2021, according to BAP’s initial surveys.
With this, BAP expressed its support for HB 6622, which pushes for the enactment of the Financial Institutions Strategic Transfer (FIST) law. It is aimed at helping financial institutions manage debt levels by selling off non-performing assets (NPAs)—NPLs and real and other properties acquired in settlement of loans—to asset management companies.
Javier said that transferring these assets will eliminate costs to manage NPAs, boost liquidity and free up some bank capital.
“The enactment of the FIST law will assist the financial system perform its role of efficiently mobilizing savings and investments for the country’s economic recovery as well as its sustained growth and development,” she added.
Image credits: Roy Domingo
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