By Katherine K. Chan, Reporter
THE PHILIPPINE BANKING sector’s nonperforming loan (NPL) ratio worsened in July as elevated inflation and higher borrowing costs drove up bad debts, preliminary Bangko Sentral ng Pilipinas (BSP) data showed.
Banks’ gross NPL ratio climbed to 3.35% in July from 3.29% a month earlier but eased from 3.4% in the same month last year.
This was the highest bad loan ratio in two months or since 3.44% in May.
In July, banks reported P585.081 billion in nonperforming loans, 9.27% higher than P535.448 billion recorded a year ago.
Month on month, soured loans inched up by 0.02% from P584.971 billion.
Loans are considered nonperforming once they are unpaid for at least 90 days after the due date. These are deemed as risk assets since borrowers are unlikely to pay.
Analysts said bad loans increased as rising consumer prices and interest rates strained borrowers’ repayment capacity and dampened banks’ lending expansion.
“The increase in nonperforming loans in July reflects pockets of financial stress among some households and businesses after an extended period of high borrowing costs and elevated inflation,” Jonathan L. Ravelas, a senior adviser at Reyes Tacandong & Co., said in a Viber message.
“While the economy continues to grow, not all sectors and borrowers are recovering at the same pace, which is affecting repayment capacity in certain segments,” he added.
Since the Middle East war broke out, inflation has sizzled above the central bank’s 3% target, squeezing consumers’ purchasing power to record lows.
In July, inflation stood at 6.2%, marking the fifth straight month that the headline print exceeded the BSP’s target. This brought the country’s seven-month inflation average to 5%.
Inflationary pressures have also prompted the BSP to tighten benchmark borrowing costs, delivering a total of 50 basis points (bps) in hikes to bring the policy rate to 4.75% as of July. It raised the key interest rate by another 25 bps in August to an over one-year high of 5%.
“At the same time, as bank lending expands, a modest rise in NPLs is a normal part of the credit cycle,” Mr. Ravelas added.
Meanwhile, Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said slower loan growth amid the Middle East conflict also pushed up the NPL ratio, as bad loans increased faster than banks’ overall loan portfolios.
“Relatively slower loan growth since the war on Iran/Middle East started reflects cautiousness by lenders in managing credit risks, amid a pickup on NPLs due to reduced ability to pay by some borrowers given higher prices and slower economic growth,” he added in a Viber message.
Separate BSP data showed big banks’ outstanding loans grew by an annual 10.4% to P14.98 trillion at end-July from P13.574 trillion.
The total loan book of Philippine banks stood at P17.448 trillion in July, slipping by 1.88% from P17.781 trillion in the prior month. However, it went up by 10.63% from the P15.771-trillion portfolio it had in July 2025.
Meanwhile, past due loans fell by 1.94% to P738.766 billion in July from P753.385 billion in June. On an annual basis, it went up by 7.44% from P687.588 billion.
Past due loans accounted for 4.23% of the industry’s total loan portfolio in July, down from 4.24% in June and 4.36% a year earlier.
Restructured loans, on the other hand, rose by 1.81% to P341.954 billion in July from P337.96 billion in the previous month. It likewise went up by 3.73% from P329.643 billion a year ago.
This brought the restructured loan ratio to 1.96%, climbing from 1.9% in June but easing from 2.09% last year.
BSP data also showed banks’ loan loss reserves edged down by 0.06% to P540.895 billion in July from P541.238 billion in June but grew by 5.63% from P512.061 billion a year earlier.
Loan loss reserves accounted for 3.1% of the system’s total loan portfolio as of end-July, a tad higher than 3.04% in June but lower than 3.25% in the prior year.
Meanwhile, banks’ NPL coverage ratio, which gauges the allowance for potential losses due to bad loans, slipped to 92.45% in July from 92.52% in the previous month and 95.63% a year ago.
Still, Mr. Ravelas noted that the uptick does not indicate a systemic problem as banks continue to hold manageable NPL ratios.
“The good news is that this does not point to a systemic banking issue,” he said. “Philippine banks remain well-capitalized and adequately provisioned, while the NPL ratio remains manageable by historical standards.”
However, Mr. Ricafort said persistent inflation could drive demand for loans, particularly from lower income households, which could also lead to more NPLs.
He also warned that the upcoming “Super El Niño” could drive bad loans higher as weather disruptions take a toll on the agriculture sector and the overall economy.
The BSP earlier said that inflation may peak by the fourth quarter as strong El Niño conditions push food prices higher, with the full-year print likely to end at 6.1%.
Mr. Ravelas said better economic and financing conditions may boost borrowers’ repayment capacity in the coming months.
“Moving forward, the key will be continued economic growth, easing inflation, lower interest rates, and prudent credit risk management to help improve borrowers’ debt-servicing capacity,” he said.
