The asset quality of Philippine banks remains strong, but measures such as the proposed Financial Institutions Strategic Transfer bill would prevent it from deteriorating vis-à-vis the impact of the pandemic.
In his presentation during a Senate hearing, Bangko Sentral Gov. Benjamin Diokno said results of a survey conducted by the central bank among top domestic banks showed that the pandemic’s hit on the financial institutions’ operations is massive.
Diokno said non-performing loan ratio is projected to doble from 2.4 percent as of last March to 4.6 percent by end-December 2020.
He attributed this to borrowers’ reduced capacity to pay their loans because of the disruption in their cash flows.
The same survey showed that deterioration in asset quality may decline banks’ consolidated capital adequacy ratio to 14.8 percent by the end of this year from 15.0 percent as of last March.
“The impact of the pandemic is significant,” he said.
The BSP chief said authorities should also learn from the lessons during the 1997 Asian financial crisis.
He said the domestic banking industry entered the said crisis with strong fundamentals, with the industry’s CAR higher than the minimum international standard of eight percent and the NPL at below four percent.
He said that because the sector’s fundamentals were strong there seemed to be no need for any intervention, which, later on proved to be wrong since NPL ratio crept and peaked at 18.6 percent in 2002.
“The NPL of Philippine banks also markedly deteriorated compared to that of other banks in jurisdictions which aggressively implemented government intervention programs to shore up confidence in the banking system,” he said.
He said NPL ratio and non-performing assets is a lagging indicator of the banking sector’s performance and a high ratio “points to severe weakness in the financial system and poor state of the country”.
High levels of these two indicators also impact on investors’ confidence and prevent the efficient conduct of financial intermediation, he said.
“Moreover, empirical studies show that an increase in NPLs leads to a reduction in credit supply, rise in unemployment and slowdown in overall economic activity in emerging economies,” he said.
Diokno said the proposed FIST Bill would address these concerns, noting that the measure is an improved version of the special purpose vehicle Act of 2002 as it incorporates learnings and experiences from the said law.
He said the proposed measure is expected to “induce economic activity and improve the liquidity of the financial system, enabling FIs (financial institutions) to respond to the looming increase in NPAs, and therefore, propel economic growth”.
“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,” he added.