Banks’ lending behavior still ‘risk-sensitive’

Banks in the Philippines continue to be risk-sensitive when it comes to lending, the central bank said on Friday, indicating that they tend to lend more to capable borrowers

The Bangko Sentral ng Pilipinas (BSP) on Friday released its first quarter report on the Philippine financial system that sought to analyze “whether the expansion of bank lending in the Philippines, indeed leads to a weakening of loan quality.”

“This study shows that Philippine banks continue to be risk-sensitive in their lending behavior as quality of loans remained relatively stable amid adverse shocks to the macroeconomic environment and more importantly, amid sustained credit growth,” the central bank said.

It acknowledged that with the Philippine economy on a higher growth trajectory of at least 6 percent cent since 2012, credit had similarly expanded by 15.1 percent, on average, from 2012 to 2017.

It noted that non-performing loan (NPL) growth was modest during the same period, averaging 6.4 percent, which resulted in a decline in the NPL ratio from 3.0 percent as of end-January 2012 to 1.7 as of end-December 2017.

“As expected, strong economic growth has a significant impact on lowering the NPL. Conversely, a negative shock to economic growth would have a modest impact on the rise of NPLs, albeit briefly,” the BSP said.
“Simply put, banks have just not lent more, but lent to capable borrowers as well,” it added.

Moving forward, the central bank emphasized that vigilant monitoring of banks’ lending standards would continue.

“This is as long-standing Basel reforms have ingrained a strong risk management culture in Philippine banks and the recently instituted reforms of Basel III will only serve to reinforce that culture,” it said.

The BSP also pointed out that it would continue efforts to strengthen risk governance via forthcoming reforms such as Credit Concentration Risk Management, Risk-based Pricing, Model Risk Management, and the Internal Capital Adequacy Assessment Process/Supervisory Review Process, which are expected to foster prudent lending.

“Moreover, the recently launched BSOS (Banking Sector Outlook Survey) serves as a complementary tool in validating the risk assessments of banking supervisors, as well as act as a proactive and forward-looking measure,” it added.

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