Lower NPL, Stronger Financial System

Banks’ NPL ratio hits 3.36% in June, lowest since October 2001

By IRIS C. GONZALES

The Philippine Star, Saturday, August 15, 2009

The country’s universal and commercial banks’ recorded its lowest non-performing loan (NPL) ratio in June, hitting 3.36 percent, the lowest figure since October 2001 when the ratio peaked at 18.81 percent, the Bangko Sentral ng Pilipinas (BSP) [Central Bank of the Philippines] reported yesterday.

The 3.36 percent ratio was lower by 0.33 percent point than the 3.69 percent recorded in May; And by 0.65 percentage point from the year ago figure of 4.01 percent.

The BSP said the ratio improved as banks’ total loan portfolio improved alongside the decline in bad loans.

Bad loans decline by 5.18 percent to P84.62 billion from the previous month’s P89.25 billion while banks’ total loan portfolio grew by 4.09 percent.

Total loans grew to P2.518 trillion in June from P2.419 trillion in May, data from the BSP also showed.

Net of interbank loans (IBL), the NPL ratio also improved to 3.79 percent in June from the previous month’s 4.20 percent and the year-ago ratio of 4.69 percent.

The BSP attributed this to the reduction in NPLs, accompanied by the 5.08 percent expansion in regular loans to P2.231 trillion.

The ratio of real and other properties acquired (ROPA) to gross assets (GA) dropped to 2.65 percent from the previous month’s 2.70 percent and the year ago ratio of 3.03 percent.

The BSP attributed this to the 0.74 percent reduction in ROPA to P138.34 billion and the expansion in gross assets.

The non-performing assets (NPA) to gross assets ratio eased to 4.29 percent in June from the previous month’s 4.46 percent and the year ago ratio of 5.01 percent.  The improvement in the ratio from last month was fueled by the 2.48 percent reduction in NPAs to P222.96 billion.

The ratio of restructured loans (RLs) to the total loan portfolio fell to 1.82 percent from the previous month’s 2.03 percent and the year ago ratio of 2.49 percent.

The ratio declined from the previous month as the 6.78 percent drop gross RLs to P46.16 billion was accompanied by the rise in loans, the BSP said.

In terms of provisioning for bad loans, the NPL coverage ratio strengthened to 102.33 percent from the previous month’s 96.16 percent.  Similarly, the NPA coverage ratio widened to 50.03 percent from the previous month’s 48.52 percent, data from the BSP also showed.

This month’s NPL and NPA coverage ratios also stood higher than the year ago ratios of 96.66 percent and 48.65 percent, respectively.

Non-Performing Loan (NPL) means loans that are in default or close to being default.  Investopedia explains NPL as “many loans become non-performing after being in default for three months, but this can depend on the contract terms.”  In layman’s term, NPL would be the non-profitable assets of a bank as of the moment. 

How does a loan provided by a bank become non-performing? 

Allow me to give you one example as how I understood it.  An entity borrowed money from the bank setting his house as collateral.  In due time, the person/company has to pay for the loan (principal together with interest), and complete its payment.  If in case the entity cannot settle its obligation to the bank, the bank will now get the collateral, which in this case is the house.  Consequently, the bank will now have the entity’s house as part of its asset.  It will lease or sell the property to a willing party.  If in case it finds no one, that property will now be part of the banks NPL.  Why?  Simply because the bank lent money to the entity but it didn’t made money for itself.   

Universal and commercial banks represent the largest single group, resource-wise, of financial institutions in the country. They offer the widest variety of banking services among financial institutions. In addition to the function of an ordinary commercial bank, universal banks are also authorized to engage in underwriting and other functions of investment houses, and to invest in equities of non-allied undertakings.

*Photo and Universal & Commercial banks meaning lifted from BSP

**NPL meaning from Investopedia

***House photo from www.logopremiums.com/bank-house-768TG.jpg

***”House For Sale” photo from coloradospringsrealestateconnection.com/files…