Better credit risk controls to boost digital banks

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.

-  A.M.C. Sy

"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 Union Digital 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.