MANILA, Philippines — A prompt loss recognition and non-performing loan (NPL) restructuring may help Philippine banks prevent sharp deleveraging and recover faster from the pandemic-induced recession, according to the International Monetary Fund (IMF).
In its latest Financial System Stability Assessment on the Philippines, the multilateral lender said the Bangko Sentral ng Pilipinas (BSP) should now withdraw forbearance measures introduced at the height of COVID-19 outbreak in 2019.
“The central bank should allow forbearance measures to lapse as scheduled and avoid introducing new measures as delayed loss recognition and NPL restructuring could limit credit growth,” the IMF said. The same scenario, it said, was observed during the Asian financial crisis in 1997.
As part of its COVID-19 response measures, the BSP implemented various measures, including time-bound regulatory relief and forbearance measures, although the scale of loan moratoria and credit guarantees has been relatively limited.
“Forbearance does not address the underlying issues in weak banks and hampers banks’ ability to continue providing credit and ultimately may even undermine financial stability,” it said.
Instead, the multilateral lender said the BSP should continue to use the flexibility of tools available in the Basel capital framework, as well as further develop and use macroprudential tools and buffers.
It also said the forbearance measures could undermine their effectiveness by reducing bank capital’s sensitivity to risks as delay keeps bank capital at artificially high levels.
“Stress tests show that while banks can withstand the already severe baseline scenario, they could experience systemic solvency distress if the economic impact of COVID-19 turns out to be severe,” the IMF said.
It warned the economic shock would weigh on corporate earnings and then spill over to banks.
“Bank stress could limit credit supply, reducing economic growth noticeably even more,” the IMF said.
Bank lending in the country contracted by 2.7 percent in February as banks remained risk averse and due to the lack of demand from borrowers.
Based on baseline scenario, the IMF said the capital adequacy ratio (CAR) of Philippine banks could fall to 11.7 percent in 2022 from the current level of 15.6 percent.
It warned the CAR of the local banking industry could fall further to 9.3 percent in adverse scenario and 4.9 percent under severe adverse scenarios, below the required 10 percent.
Under the baseline scenario, the IMF said 185 banks, comprising mainly of rural and cooperative banks, would not be able to meet the required CAR.
The IMF sees the banking sector’s CAR recovering in 2022 as the Philippines recover from the pandemic-induced recession.
Given the significant downside risks, the IMF said monetary authorities should limit bank dividend distributions and the BSP should be ready to take additional measures to strengthen the bank’s capital if risks materialize.