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April 12, 2024

Loan processes pose risks for digital banks in the Philippines

Digital banks in the Philippines face significant challenges in managing loans and collections, according to Bangko Sentral ng Pilipinas (BSP) Governor Eli M. Remolona Jr.

These challenges are largely due to the nature of their operations, which require innovative approaches to lending and collection processes.

Remolona, in a statement, highlighted the experimental nature of digital banking, particularly in the areas of unsecured lending and loan collection. While digital banks have been successful in attracting deposits from the public, the process of disbursing loans and ensuring timely collections remains a major hurdle, he said.

The BSP has been closely monitoring the performance of digital banks, particularly in terms of asset quality and non-performing loans (NPLs). Data from December 2023 showed that digital banks have a gross NPL ratio of 14.49 percent, higher than the industry average of 3.23 percent.

The high NPL ratio can be attributed to the challenges digital banks face in disbursing loans and collecting payments.

S&P Global Ratings also noted the weak asset quality of digital banks in the Philippines, citing their heavy exposure to unsecured consumer loans and the largely untested credit profile of their target customers. This has led to significant losses for digital banks, as they struggle to manage high costs and delinquencies.

Despite these challenges, the BSP limited the number of digital banks in the country to six, allowing them to closely monitor their performance and impact on the banking system. The BSP is also considering reopening the application window for digital banks earlier than scheduled, to allow for the establishment of more digital banks in the future.

Overall, the future of digital banking in the Philippines remains uncertain, as banks continue to grapple with the challenges of managing loans and collections in an increasingly digital landscape.

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