In the wake of the COVID-19 pandemic, the Philippines might just be the most stressed nation in the region when it comes to household finances. Indeed, 7 out of every 10 Filipinos are currently struggling with debt according to the Amsterdam-based fintech Backbase.
The study noted that “Compared with the rest of APAC consumers, Filipinos are the most stressed about their current financial situation. They also feel more anxious and uncertain.” One of the major sources of this uncertainty and anxiety is debt, with 67% feeling overwhelmed by household debt.
How is this going to be affecting non-performing loans in the country? And what can be done to prevent a debt disaster?
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How did we get here?
The pandemic had a cataclysmic impact on economies and homes across the country. The government’s outstanding debt reached 11.7 trillion pesos ($229 billion) at the end of December 2021, up by a fifth from a year ago. The debt-to-GDP ratio, meanwhile, widened from 54.6% in 2020 to 60.5% in 2021.
We are now well into the third year of the COVID pandemic and one of the most profound concerns facing the Philippines is not only how the government handles its own pandemic-catalyzed debts but also what kind of debt burden will be placed on households.
There has been a fair amount of relief, with over 1.53 trillion pesos of aid distributed to the most vulnerable households in Manila and other areas of the country. However, household debt currently stands at around 2 trillion pesos ($39 billion) and there are worries that these debts will lead to NPLs in the coming months and years. Or are there?
NPLs in the Philippines
While NPLs hit a 13-year high of 4.51% during the peak of the pandemic in 2020, the NPL ratio of Philippine banks decreased to an eight-month low of 4.35% in November 2021. From January to November 2020, bad debts accelerated by 19.1% from 405 billion pesos to 482 billion pesos.
The asset quality of the industry deteriorated steadily over the course of the year as banks piled up NPLs and past-due loans while the economic impact of the pandemic took hold.
Amidst rising defaults due to the impact of the pandemic-induced recession, the allowance for credit losses increased by 19% to 19.86 billion pesos. However, that was more than a year ago and things have improved since then.
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Where are we going?
The central bank is confident that the NPL ratio will remain in single-digit figures until the end of 2022. However, they also estimate that “the NPL ratio is likely to peak at 8.2% in 2022, which is twice the current NPL ratio, but it will decline in the years thereafter.” They also acknowledge that the projected levels of NPLs are much lower than during the Asian financial crisis in the late 90s.
According to central bank Governor Benjamin Diokno: “Loan quality will remain manageable” thanks to the FIST Act signed in early 2021, which “will provide banks with a stand-by facility to offload their non-performing assets in case these post a sharp increase.”
Matters will also be helped by the fact that digital transformation is well underway already, with half of all transactions expected to be digital by 2023. The central bank has already licensed a handful of digital banks and they are competing quite aggressively with their traditional competitors, which are also launching their own digital offerings. These new online banks could help foster an increased level of financial literacy and debt management amongst locals and prevent vulnerable customers from making unwise borrowing decisions.
This is good news for lenders worrying about debts becoming NPLs but there is still a lot of groundwork that needs to be done.
What must be done?
While the Philippines is a developing nation it is also one with a decent grasp of digital technology, with 68% of Filipinos using smartphones to manage their banking. However, trust in digital banks remains low with only 18% of Filipinos claiming to trust them. Lower trust in “new ways” of banking is, of course, always to be expected but trust is going to have to be built faster if locals are going to be able to take advantage of what digital banking can offer.
The best way to get them on board is to invest in and build better interfaces, infrastructures, and tools to address the underlying issues of trust. Traditional retail banks can also comfortably compete in this space and potentially offer the best of both worlds - the inherent trust of a respected brand and the tools and technologies of their digital competitors.
If lenders in the Philippines can find this ideal middle ground then they could cut even further into the country’s NPL ratio as the pandemic begins to subside and life starts to return to normal.
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