Practicing sound credit risk management

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Managing bad loans so as to prevent credit losses has long been a challenge for banks. Such scenario is particularly more evident in rural banks, whose clients are typically composed of low-income families more vulnerable to financial stress.

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From time to time, in the course of doing business, these banks find themselves putting a little extra effort to balance the need to maintain profitability and their mandate to serve the underprivileged.

Fortunately though, rural banks have found the right strategy in handling these situations as statistics indicate that they have successfully trimmed their soured loans.

Recent data from the Bangko Sentral ng Pilipinas (BSP) showed that the combined gross non-performing loans (NPL) of both rural and cooperative banks declined to just 12.24 percent of their total loan portfolio last September, an improvement from the 13.45 percent figure recorded in the second quarter and the lowest level registered since June 2013.

The BSP noted that the top borrowers of the banks across economic sectors were agriculture, hunting, forestry and fishing; wholesale and retail trade; loans to individuals for consumption purposes; and real estate, renting and business activities. Moreover, the central bank reported that rural and cooperative banks also increased its allocation for loan loss reserves in September, which was at 57.58 percent of their gross NPL for the period.

Besides displaying stability, these numbers indicate the commitment of small banks in implementing internal reforms for the stability of the country’s entire financial sector. Despite the challenge, rural banks in particular are gearing up for the new regulations rolled out by the BSP that seeks to improve the country’s credit risk management systems.

Among others, the new regulations require all banks and quasi-banks to establish an internal credit risk rating system anchored on the nature, size and complexity of their operations. Banks will also be required to come up with a loan loss methodology that sets estimate provisions for credits, based on expected loss model and the bank’s historical loss rates and experienced credit judgment.

Collectively, Philippine banks are equally showing signs of industry strength. Recent central bank data revealed that the combined NPL ratio of universal, commercial, thrift, rural and cooperative banks stood 2.31 percent in December last year—the lowest NPL level recorded by BSP in over a decade.

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