THE P200-billion decline in the banking industry’s loan portfolio may have an adverse impact not only on the sector but on the economy as well, an audit firm said.
Isla Lipana & Co. said that banks appear to be cautious when it comes to extending credit amid the pandemic, noting that a 2-percent drop—translating to around P200 billion—was recorded for the loan portfolio from December 2019 to May 2020.
This, as loans-to-deposit ratio slid from 80.2 percent to 75.8 percent for the same period.
“In the long run, this is not healthy for both the financial services sector and the economy,” Isla Lipana said.
The audit firm said that the banks should be able to provide loans and generate earnings to compensate for the potential losses from defaults and cost of carrying deposits.
According to the latest preliminary data of the Bangko Sentral ng Pilipinas (BSP), gross nonperforming loans (NPLs) amounted to P262.68 billion as of end-May, which is 20 percent more than P218.89 billion notched in the same period last year.
“They would also be missing the opportunity to build lasting relationships with borrowers if they would fail to give financing now when their clients needed it the most,” it added.
Crucial role
The audit firm stressed that the banks are crucial for economic development.
“They spur economic activities by infusing capital to businesses that require funding and securing those funds from those who have no need of the same for the time being,” it explained. “Especially during crisis situations, banks had been vital in rescuing companies and economies from default as what happened during the Asian Currency Crisis.”
The BSP in May shared that the financial system is expected to book P556.6 billion worth of NPLs in 2020 amid the economic downturn. This is equivalent to 5 percent in NPL ratio—portion of NPL to total loans—which is more than double of what the sector has been dealing with in the recent years.
Isla Lipana said the banks have been extending bridge loans and restructuring existing borrowings to help entities with cash flow problems.
This is why the government and regulators ensure that the financial system is sound, robust and resilient, the audit firm said, noting that the BSP has employed several measures to keep the industry liquid and well-capitalized.
The BSP, Isla Lipana recalled, has cut reserve requirements, lowered the requirement minimum liquidity ratios for smaller banks and eased payment of obligations to rediscounting facility, among others.
These initiatives freed up more liquidity into the economy, the audit firm said. Cash-to-deposit ratio rose from 20.5 percent to 22.2 percent, while liquid assets-to-deposit ratio spiked from 47.9 percent to 49.9 percent in May 2020 from December 2019.
In addition, Isla Lipana said that a bill allowing banks to unload their nonperforming assets via special-purpose vehicles was being pushed into law.
“With all these support from both the government and regulators, banks are well-positioned to assist in the recovery of ailing businesses,” it said.
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