LOCAL BANKS’ bad loans continued to rise in July as the economy was battered by the coronavirus pandemic, bringing the industry’s nonperforming loan (NPL) ratio to its highest level since 2014.

Gross bad loans climbed by nearly a third (32.1%) to P290.1 billion in July from P219.6 billion a year ago, according to data from the Bangko Sentral ng Pilipinas (BSP).

The industry-wide gross bad loan ratio stood at 2.67% as of end-July, rising from the 2.53% as of end-June. This was also the highest in six years or since the 2.74% logged in August 2014.

Bad loans are those left unpaid for at least 30 days after the due date. These are considered risky assets because borrowers are unlikely to settle these loans.

The central bank is projecting the bad loan ratio to rise to 4.6% by end-December. It reached 17.6% in the aftermath of the Asian financial crisis in 2002.

The rise in soured loans outpaced the 5.14% growth in the industry’s loan portfolio to P10.86 trillion in July.

Economic activity in the country was halted due to strict lockdown measures that began in mid-March to curb the rise in coronavirus infections. Metro Manila remains under a general community quarantine until Sept. 30. Coronavirus cases stood at 248,947 as of Thursday.

Past due loans ballooned by 88.8% to P573.2 billion in July, pushing the industry’s past due loan ratio to 5.28% from 3.49% in June.

Restructured loans jumped by 23.14% to P49.03 billion in July. The ratio of restructured loans to the total loan book stood at 0.45% for the third consecutive month, up from the 0.39% a year ago.

As the pandemic continues to affect the quality of loan books, banks’ provision for credit losses jumped by 59% to P321.85 billion from the P202.22 billion it set aside last year.

The industry’s bad loan coverage ratio, which measures their allowance for potential losses due to soured loans, stood at 110.94% as of end-July, higher than 92.1% a year ago and 109.87% logged in June.

Meanwhile, the capital adequacy ratio (CAR) stood at 12.69%, slightly worse than 12.85% a year ago and 12.73% in the prior month. Despite this, the end-July ratio of the banking industry was still beyond the 10% minimum requirement set by the BSP.

The continued rise in nonperforming loans comes as no surprise with the economy in recession, according to Colegio de San Juan de Letran Graduate School Dean Emmanuel J. Lopez.

“The situation is an offshoot of the economic recession that the country is experiencing currently, and this phenomenon is expected to worsen until the end of the year, when economic authorities project a major economic contraction in our GDP (gross domestic product),” Mr. Lopez said in a text message.

The country entered a recession after economic output plunged by a record 16.5% in the second quarter. The government expects GDP to shrink by 4.5% to 6.6% this year.

Mr. Lopez said banks are now left with no choice but to buy time and wait for the economy to “at least return to a semblance of normalcy.”

In July, bank lending expanded by 6.7% year on year, the slowest since 5% in March 2010.

The Financial Institutions Strategic Transfer Bill, which will create asset management companies to relieve banks of their bad loans, has been passed in the House of Representatives and is pending in the Senate. — Luz Wendy T. Noble