Economic trends: Loan portfolio quality

According to the Institute for Development and Econometric Analysis, Inc. (IDEA) latest Economic Trends, a regular publication produced by IDEA, Inc., there has been a declining non-performing loan to total loan ratio from March-May 2011. In comparison to the previous year’s trend, it has brought the banking industry positive news. The declining ratio can be explained by the high turn-over rate of loans. This is to say that borrowers, as compared to last year, have greater ability to pay back, perhaps a reflection of favorable market conditions. With higher turn-over rate, banks can now channel funds to borrowers faster. Thus, funds are further made available to those who need it. Moreover, to overcome asymmetric problems, banks have been implementing uptight lending rules to lower down the likelihood of default. All of these points out that bank lending for this year is geared towards achieving high-quality standards and sound financial practices while contributing to economic prosperity by consumer lending.

Furthermore according to the same published report, intensive bank lending can stem disadvantages to the different stakeholders of the economy. First, while the economy gains with the development of various sectors with the fact that investments are realized as funds are channeled towards it, credit expansion, however, gives us the idea that inflation could persist which could be seen in the workings of money creation through deposits synchronized with loans by banks. This effect on inflation, however, may be restrained as loans were mostly directed to firms promoting production through investment. If investments are successful, credit expansion may even temper inflation as supply expands.

Second, the long-term effect of lending boom on economic growth will be limited if subprime lending is left unchecked. The impression is that lending boom will increase leverage that even investments with low net present value, if not negative, can acquire financing as monitoring may become looser when the volume of lending increases. This end does not only injure the banking sector but the whole economy as well as the former is the sole largest source of financing for businesses, and perhaps households as well.

Lastly, IDEA sees the Philippine economy to meet the government’s GDP target for 2011. For the next two years, better outlook on construction, business process outsourcing, tourism, and remittances lend optimism over stability of growth. Moreover, the speeding up of government projects through the public-private partnerships program could boost demand for credit. In the course of this credit expansion, the Bangko Sentral ng Pilipinas (BSP) is expected to strengthen its prudential measures to certify that only the gains from the lending boom feed into the economy and not its usual harmful outcome, according to the Institute for Development and Econometric Analysis, Inc. (IDEA).

For comments, rejoinders and questions related to credit & collection, send email to [email protected].