Banks’ bad loan ratio eases to 3-month low

MANILA, Philippines - Bad loans held by Philippine banks declined to a three-month low in March, as the ongoing interest rate-cutting cycle of the Bangko Sentral ng Pilipinas (BSP) helped ease the debt service burden of many borrowers.

Latest data from the BSP showed the gross amount of nonperforming loans (NPL)—or credit that is 90 days late on a payment and at risk of default—had cornered 3.3 percent of the local banking sector’s total lending portfolio.

READ: Banks’ bad loan ratio steady at 3.38% in February 2025

That figure, known as the gross NPL ratio, was the lowest since the 3.27 percent recorded in December 2024.

In peso terms, this means P516.1 billion of the domestic banking industry’s P15.6-trillion loan book had soured in March. That amount of NPLs was 11.1 percent higher compared with a year ago.

As it is, the decline in the gross NPL ratio coincided with the ongoing easing cycle of the BSP.

Last April, the central bank cut the key rate by a quarter point, as softer inflation allowed monetary authorities to resume their easing cycle in the face of global headwinds from sweeping US tariffs.

Dovish cycle

The decision of the powerful Monetary Board (MB), led by BSP Governor Eli Remolona Jr., lowered the overnight rate that banks use as a guide when pricing loans to 5.5 percent. This put the total rate cuts under the current cycle at 100 basis points.

In a commentary, Nomura said about 80 percent of the total policy rate cuts so far had been absorbed by the local banking system already.

This transmission of monetary policy to lending rates was significantly faster than the 30 percent pass-through seen during the last easing cycle in 2019 to 2020.

The Japanese investment bank said the BSP’s reforms and “timely” move to further reduce the reserve requirement of banks had helped shorten the lag.

As the rate cuts eased the debt service burden of many Filipinos, BSP data showed the ratio of restructured loans, or credit that had been renegotiated with struggling borrowers, likewise fell to 1.99 percent, the lowest in six months.

This allowed some banks to reduce their rainy-day funds, which can give them more available cash to lend and invest.

In March, banks set aside P490.6 billion as allowance for potential losses from unpaid loans. This yielded an NPL coverage ratio of 95.05 percent, a four-month low.

(2025/05/19-02:11)