THE banking industry may find it more difficult to evaluate credit risk when extending borrowings as the anticipated economic recession weighs on payment capabilities of the borrowers.
ING Bank Manila Economist Nicholas Antonio T. Mapa, in an e-mail to the BusinessMirror, said that there was still strong demand for loans because consumers will likely need additional funding to address cash flow concerns and rebuild their business amid the coronavirus pandemic.
While this means that banks would have stable revenue-generating activities, he noted that the sector could be dealing with assessing potential risk that comes along with providing loans.
“Given, however, the increased risks, stemming in large part from the challenging macroeconomic environment and rising debt, banks will be hard pressed to gauge the amount of risk associated with borrowers as making repayments in an environment of economic recession will be highly challenging,” he said.
The Philippine banking system’s total loan portfolio stood at nearly P11 trillion as of end-April, which was 8.08 percent higher compared to P10.18 trillion for the same period last year.
Of this amount, P252.26 billion was tagged as bad debts or nonperforming loans (NPLs). This was 18.32 percent more compared to P213.52 billion last year.
RCBC Chief Economist Michael L. Ricafort, meanwhile, is confident that the banking sector can handle such concern given its credit risk management systems which have been improving over the years.
“The assessment of credit risks/premiums has already improved in recent years, as also supported by the greater availability/sharing of credit information of various borrowers, thereby leading to better informed, more calculated and prudent lending-related decisions,” he explained.
UnionBank Chief Economist Ruben Carlo O. Asuncion warned that banks might deal with a more challenging situation when bad loans increase and become unmanageable.
Boosting loan demand
While the Bangko Sentral ng Pilipinas (BSP) extended measures to boost demand for loans, Asuncion said that it was up to the banks to market their borrowing services during this crisis.
Mapa said that even though demand for credit is always likely present, it could be improved by making the offer more attractive.
“Lower[ing] the prices for money [interest rates] is one angle to help bolster loan growth while pushing out the amortization schedule is another way to attract loan demand,” he said.
“Banks can also improve the quality of their product with ‘add-ons’ or features as financial institutions get creative with cross selling opportunities [insurance] or tailor fit loans to do tie-ups with the products associated with their loans [housing, auto, etc.],” Mapa continued.
Ricafort, meanwhile, said that monetary easing policy of the Central Bank has encouraged greater demand for borrowings, noting this made loans cheaper for businesses, households and other institutions.
Along with this, the RCBC economist said that the interest rate cut added more liquidity into the banking system to support its lending function.
“By freeing up money for banks to channel to the productive sector of the economy, BSP hopes to provide the environment that will be conducive for the economic bounce back,” Mapa added.
Grace period
As more areas are placed under general community quarantine, the moratorium on debt payments is lifted as well.
Asuncion said that while the grace period extensions are encouraged, they should not be required.
“I would like to believe that banks are proactive in making sure that their portfolios are healthy and sustainable especially during these uncertain times,” he added.
Ricafort said that this matter should be dealt with on a case-to-case basis.
“It would be tempting to push for an extension to the grace period to give additional leeway for customers but we must also recognize the role of banks in the economy as financial intermediary,” Mapa said.
