The Bangko Sentral ng Pilipinas (BSP) will resume accepting applications for the country’s digital banking license after three years, a move that opens up the industry to more players as it navigates the path to profitability.
The number of slots for digital banking license applications available remains unclear, but BSP Governor Eli Remolona Jr. informed the Philippine Daily Inquirer that a circular on this matter will be released “soon.”
This decision follows the BSP’s initial assessment of current players, including UNO Digital Bank, UnionDigital Bank, GoTyme, Overseas Filipino Bank of state-run Land Bank of the Philippines, Tonik Digital Bank, and Maya Bank. The central bank has indicated that an industry report will be published this year.
Governor Remolona noted that “quite a few are interested” in joining the local digital banking sector, with companies eager for the BSP to reopen applications.
The initial three-year moratorium on digital banking permits, imposed in 2021, allowed the regulator to monitor the performance of these new lenders and their impact on the financial system.
Digital banks, leveraging mobile technology and artificial intelligence, primarily serve unbanked Filipinos with largely untested credit profiles. As of last March, the BSP reported that only two out of the six digital banks in the country were profitable, projecting a profitability timeline of five to seven years for digital banks. Globally, only 5% of digital banks are currently profitable, according to the central bank.
The sector’s struggle for profitability is largely due to their lending activities. Recent BSP data showed that in May, P4.9 billion of digital banks’ total loan portfolio was considered non-performing — ie. over 90 days late on a payment — resulting in a gross non-performing loan (NPL) ratio of 20.64%, an increase from the previous month’s 17.69%.
This NPL ratio is significantly higher than the 3.57% recorded for the entire local banking industry, which consists mainly of traditional banks serving affluent segments with established credit profiles.
This high level of bad debts is forcing digital banks to allocate a substantial portion of their capital as a buffer against losses from unpaid loans, limiting funds available for new lending activities. Consequently, the high provisioning is adding to their already elevated expenditures.
Despite challenges with NPLs and profitability, digital banks are showing strong performance in raising deposits. Data from the Digital Bank Association of the Philippines (DiBA PH) revealed that the sector saw a 27% growth in their depositor base between September and December 2023.
This growth is in contrast to the 4% overall growth of the banking system, bringing the total digital banking depositor base to 5.9 million by the end of 2023.
Featured image credit: Edited from Freepik