Banks’ bad loan ratio drops to 9-month low

In September

MANILA, Philippines — The share of bad loans held by Philippine banks fell to a nine-month low in September as continued credit growth enlarged the industry’s loan base, but gross bad loans still increased from a year ago.

Preliminary data from the Bangko Sentral ng Pilipinas showed the banking industry’s non-performing loan (NPL) ratio eased to 3.27 percent in September from 3.35 percent in August. It was also lower than the 3.31 percent recorded in September last year.

The latest reading was the lowest since the NPL ratio hit 3.07 percent in December 2025.

NPLs refer to loans whose principal or interest payments have remained unpaid for at least 90 days after their due date. The ratio measures how much of banks’ total loan portfolio has turned sour, making it a key gauge of borrowers’ repayment capacity and the banking system’s asset quality.

In peso terms, gross bad loans still increased by 10.1 percent year-on-year to P593.27 billion in September from P538.92 billion.

However, the banking system’s gross loan portfolio expanded at a faster pace of 11.4 percent to P18.13 trillion from P16.28 trillion a year earlier. This helped bring down the NPL ratio as problem loans accounted for a smaller share of the industry’s larger loan book.

RCBC chief economist Michael Ricafort said the lower NPL ratio was “partly due to higher base or denominator effects,” with some banks also becoming “more cautious on lending standards.”

A lower NPL ratio generally indicates better asset quality because fewer loans are experiencing repayment problems. Still, Ricafort warned that the improvement could come under pressure from weaker economic conditions, higher inflation and elevated borrowing costs.

Ricafort said bad loans could rise as slower economic growth, higher inflation and elevated interest rates weaken some borrowers’ ability to repay. These factors, he said, could weaken some borrowers’ ability to meet their debt obligations.

Other indicators showed that repayment pressures have not disappeared entirely.

Past-due loans, or obligations with missed payments that have not necessarily been classified as non-performing, went up by 13.9 percent to P771.75 billion in September from P677.82 billion a year ago.

This translated to a past-due loan ratio of 4.26 percent, higher than the 4.16-percent ratio a year earlier, but lower than August’s 4.33 percent.

Meanwhile, restructured loans increased by three percent to P342.78 billion from P332.76 billion in September 2025.

Restructured loans refer to accounts whose original payment terms have been modified to help borrowers continue servicing their obligations. Their share of the total loan portfolio declined to 1.89 percent from 2.04 percent a year ago and 1.92 percent in August.

Banks also continued to build buffers against potential loan losses. The allowance for credit losses, or funds set aside to absorb possible defaults, rose 10.3 percent to P557.98 billion from P505.77 billion a year earlier.

Looking ahead, Ricafort said further interest rate increases could put additional pressure on borrowers.

He also flagged the risk of a severe El Niño episode, saying a “super El Niño drought could also reduce the ability to pay by some borrowers, especially in the agriculture sector.”

Ricafort said businesses with limited ability to pass on higher costs to customers are among those most exposed, as stronger competition and rising input costs could squeeze profit margins or lead to losses.

Lower-income borrowers may also be more vulnerable, as higher prices erode household budgets and purchasing power, making it harder to meet loan payments.