Philippine Digital Banks Confront Lending Risks Amid Push for Financial Inclusion

Philippine digital banks aiming to tap the country’s large unbanked and underbanked population are facing significant risks associated with lending to these segments, Fitch Ratings reported.

The Philippines, like several other Asia-Pacific markets, has lower credit and banking penetration compared to developed economies.

Digital lenders see growth opportunities by targeting individuals with limited or no credit histories to expand their loan books and optimize balance sheets.

However, Fitch cautioned that the potential customer base might be constrained by lower incomes and minimal credit or payment histories, making it challenging for banks to price loans effectively.

The non-performing loan (NPL) ratio for Philippine digital banks surged to 14.1% in July 2024 from 5.9% in December 2022, indicating a rapid deterioration in loan quality.

This rise in bad loans has significantly increased credit costs, nearly offsetting the interest income generated by these banks. Fitch noted that exposure to higher-risk customer segments leaves digital banks more susceptible to economic fluctuations and interest rate changes.

The report highlighted that digital banks in the Philippines, Indonesia, and Hong Kong experienced a faster increase in impairment costs compared to the system average last year, particularly in markets that implemented steep rate hikes.

Despite the challenges, Fitch remains optimistic that Philippine digital banks could enhance their risk screening capabilities over time as they gather more data on their growing customer base.

Digital banking is a relatively new formal category in the Philippines, approved by the Bangko Sentral ng Pilipinas (BSP) in 2020.

The BSP has granted digital banking licenses to GoTyme Bank, Maya Bank, Overseas Filipino Bank, Tonik Digital Bank, UnionDigital Bank, and UNOBank.

The central bank plans to lift its moratorium on issuing new digital banking licenses starting January 1, 2025, but will limit the total number to ten.

The expanding presence of digital banks has intensified funding competition in local markets. Some digital lenders in the Philippines and Indonesia are aggressively offering time deposit rates nearly double those of incumbent banks.

While these promotional rates are unlikely to be sustainable in the long term, the heightened competition has compressed net interest margins for smaller traditional lenders that must compete vigorously for deposits.

Fitch reported that at least 16 out of more than 45 digital banks in the Asia-Pacific region have achieved breakeven, with Japanese digital banks having the longest records of profitability.



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