DIGITAL BANKS in the Philippines need to refine their credit risk controls to improve their asset quality and profitability as the industry continues to develop, the ASEAN+3 Macroeconomic Research Office (AMRO) said in a report.
“To sustain progress and achieve long-term profitability, digital banks must continue refining credit risk practices. Their resilience will be tested across credit cycles, especially during downturns, requiring robust, risk-based underwriting and adaptive risk management frameworks,” AMRO said an article in its ASEAN+3 Financial Stability Report released on Thursday.
The Bangko Sentral ng Pilipinas (BSP) in 2020 came out with guidelines on the establishment of digital banks. In 2021, it granted six digital banking licenses to Overseas Filipino Bank, Tonik Digital Bank, Inc., UNO Digital Bank, GoTyme Bank, Maya Bank, Inc., and UnionDigital Bank, Inc.
It then imposed a three-year licensing moratorium, which was lifted earlier this year as the BSP said it was going to open four more slots to new players.
Last month, the central bank resumed the licensing freeze. It will stop accepting applications for new digital bank licenses after Nov. 30.
“[Digital] banks in the Philippines are still building their credit risk management capabilities, especially as they target underserved borrowers with limited credit histories,” AMRO said.
This is reflected in the sector’s volatile nonperforming loan (NPL) ratios, it said.
The sector’s NPL ratio has eased to 7% at end-July from the peak of 25.3% in March 2024, BSP data showed.
“Consistent with these trends, the digital banks recorded losses, partly because credit costs increased, including those for provisioning in response to rising credit risks and write-offs on nonperforming loans,” AMRO said. “High NPLs may reflect early-stage trial-and-error, structural challenges like limited debt collection infrastructure, and nascent underwriting standards.”
“The recent improvement in NPL ratios suggests digital banks are refining strategies and credit risk controls by enhancing expertise, reassessing customer segments, and strengthening data-driven underwriting.”
AMRO said digital banks have a “strong potential” in improving financial inclusion in the Philippines.
“The country’s archipelagic geography makes digital delivery particularly effective, aligning with broader goals of Bangko Sentral ng Pilipinas, the central bank, to expand financial access,” it said.
According to BSP data, the industry’s total loans stood at P48.68 billion as of August, while deposits were at P115.67 billion.
However, AMRO noted these represented less than 1% of the total loans and deposits of the whole banking industry.
It added that as these banks’ balance sheets grow, high capital and liquidity buffers will likely gradually normalize given their low profitability and reliance on subsidized offerings to gain market share.
The digital banking industry recorded a net loss of P2.38 million in the first half, narrowing from the P4.11-billion loss in the comparable year-ago period.
AMRO added that the BSP’s test-and-learn approach to the digital banking sector through its phased licensing framework balances inclusion and risk management.
“Digital banks are monitored for both financial inclusion and stability, and are subject to the same prudential standards as traditional banks, including credit risk regulation. As the central bank gains further experience, it may refine regulations in consultation with the industry — offering valuable lessons for other jurisdictions.”
It said the rise of digital banks in the region is helping boost financial inclusion and innovation but could also pose stability risks that could come from liquidity concerns and increased cyberattacks that target financial services.
“While ASEAN+3 has yet to face systemic risks from cyber incidents, it is important to understand the channels through which cyber risks can also amplify systemic risk. These are erosion of confidence, lack of substitutes, and interconnectedness,” it said.
AMRO added that regulators in the region should be agile when developing policies amid the quick pace of the digitalization of financial services.
“While there are multiple approaches to regulations, authorities need to be flexible in gradually shifting their regulatory frameworks with changes in the landscape.” — A.M.C. Sy
