Bangko Sentral ng Pilipinas
MANILA, Philippines — Bad debts held by the Philippine banking system rose to their highest level in eight months in July, as lenders—facing slimmer margins from declining interest rates—may have leaned more on riskier retail borrowers in search of yield.
Latest data from the Bangko Sentral ng Pilipinas showed that nonperforming loans (NPL), or debts overdue by at least 90 days and at risk of default, accounted for 3.40 percent of the industry’s total loan portfolio. That marked the highest share since November 2024, when the NPL ratio stood at 3.54 percent.
In peso terms, some P535.45 billion of the sector’s P15.77-trillion loan book had soured in July—a 5.38-percent increase from a year earlier. Banks responded by setting aside P512 billion in allowances against potential losses, lifting the coverage ratio to 95.63 percent, the highest in eight months.
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Analysts said the uptick underscores the twin pressures facing banks: protecting margins in a low-rate environment while guarding against credit risks.
“It reflects delayed effects of tighter credit conditions earlier in the year, combined with a likely shift toward riskier lending as rates started easing,” said John Paolo Rivera, a senior research fellow at state-run think tank Philippine Institute for Development Studies.
“While falling interest rates generally support repayment capacity, they may also encourage both banks and borrowers to take on more credit risk, especially in consumer segments like buy now, pay later and online lending, where delinquencies are rising,” he added.
The rise in soured loans coincided with a softer credit growth.
A separate BSP report showed bank lending expanded 11.8 percent year-on-year in July, easing from the 12.1-percent increase in June. Loans to businesses slowed to 10.8 percent from 11.1 percent, while consumer lending remained brisk but moderated to 23.6 percent from 24 percent.
Lower rates
In August, the BSP trimmed its benchmark rate by another quarter point to 5 percent—a level Governor Eli Remolona Jr. described as the “sweet spot,” neither too low to fuel inflation nor too high to choke growth.
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“Lower interest rates may be encouraging borrowing, but not all borrowers are equally resilient,” said Jonathan Ravelas, senior adviser at Reyes Tacandong & Co. “Banks are rightly beefing up provisions. It’s a sign they’re cautious, not complacent.”
Rivera warned that lending risks remain tilted to the upside “amid still-soft labor conditions and elevated household debt.”
“However, stronger provisioning and improved credit risk tools may help contain systemic risks,” he added.
Michael Ricafort, chief economist at Rizal Commercial Banking Corp., said a faster growth in bank loans would help expand the denominator for NPLs. This, he explained, would “mathematically sustain the NPL ratio to the lowest in nearly five years or since August 2020.”
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But Ricafort said banks should continue to adopt “global best practices in credit risk management.”/rwd
