THE increase in bad loans ratio in July reflects ‘pockets’ of financial stress among some households and businesses after an extended period of high borrowing costs and elevated inflation, according to analysts.
Experts pointed this out after data from the Bangko Sentral ng Pilipinas (BSP) showed that the gross non-performing loans (NPLs) ratio climbed to 3.35 percent in July 2026-the highest in two months or since May 2026.
Data showed that the peso value of bad loans climbed to P585.08 billion, up 9.27 percent from the P535.448 billion recorded in end-July 2025.
Similarly, bad loans as of end-July 2026 were higher by 0.02 percent than the P584.97 billion as of end-June 2026.
NPLs, also known as ‘bad’ or ‘soured’ loans, are credit accommodations that have not been paid for 90 days or more after the due date. The NPL ratio measures the proportion of bad loans to total loans.
Meanwhile, total loan portfolio amounted to P17.45 trillion as of end-July 2026. This was 1.86 percent lower than the P17.78 trillion as of end-June 2026.
‘While the economy continues to grow, not all sectors and borrowers are recovering at the same pace, which is affecting repayment capacity in certain segments. At the same time, as bank lending expands, a modest rise in NPLs is a normal part of the credit cycle,’ Jonathan L. Ravelas, senior adviser at Reyes Tacandong and Co. said in a Viber message.
Michael L. Ricafort, chief economist at Rizal Commercial Banking Corporation (RCBC), explained that the higher inflation and interest rates have ‘effectively’ reduced spending power and consumption thereby reducing sales, earnings, and employment.
As a result, he said these reduced the ability to pay by borrowing businesses, industries, households and other institutions.
Breakdown
THE NPL ratio of universal and commercial bank group stood at 3.08 percent with the peso value of bad loans amounting to P495.91 billion, as of end-July. The ratio is higher than the 3.01 percent in June but lower than the 3.12 percent in June last year.
For thrift or savings banks, the NPL ratio plunged to 6.16 percent, or P65.87 billion, as of end-July 2026 from 6.33 percent in June, but remained above the 6.06 percent level in July 2025.
Meanwhile, the asset quality of digital banks worsened with their NPL ratio climbing to 6.45 percent, or P5.395 billion, as of end-July 2026 from 6.16 percent at end-June. This was, however, lower compared to the 6.98 percent NPL ratio in July last year.
Meanwhile, past due loans reached P738.77 billion as of end-July 2026, down by 1.94 percent from P753.38 billion a month ago; and higher by 7.44 percent from P687.59 billion billion at end-July 2025.
The past due loans ratio settled at 4.23 percent of banks’ total loan portfolio in July 2026, lower than the 4.24 percent in June 2026 and the 4.36 percent in July 2025.
Moving forward, Ravelas said the key will be ‘continued’ economic growth, easing inflation, lower interest rates, and ‘prudent’ credit risk management to help improve borrowers’ debt-servicing capacity.
Ricafort said for the coming months, continued stronger growth in loans compared to economic growth could still reflect some ‘frontloading and hedging of various purchases by some borrowing businesses before prices and interest rates go up further as a matter of prudence’ amid the conflict in the Middle East.
He explained that the front-loading of purchases could expand the ‘loans denominator’ which could somewhat temper the bad loans ratio.
Still, he said the faster increase in the prices of goods and services or inflation could lead to ‘greater need for loans by those that barely make ends meet, especially those at lower income brackets,’ which he said could be the source of bad loans.
‘Future economic/GDP growth would be an important catalyst for lenders and credit rating agencies in terms of catch-up government spending, especially on infrastructure, to make up for the underspending since the latter part of 2025 largely due to the anomalous flood-control projects since then,’ Ricafort explained.
He added that faster economic growth would help boost sales, incomes, and employment ‘that tend to improve the ability to pay by some borrowers than otherwise in view of geopolitical uncertainties/risks in recent months.’
He also warned that a strong El Niño drought from the fourth quarter of 2026 to early 2027 could be a source of new bad loans, especially for the hardest hit sectors in agriculture and other affected businesses, industries, consumers, and households.
Ravelas said the recent increase in bad loans does not point to a systemic banking issue.
‘Philippine banks remain well-capitalized and adequately provisioned, while the NPL ratio remains manageable by historical standards,’ added Ravelas.