Filipinos and local companies are good borrowers. According to a recent report from the Bangko Sentral ng Pilipinas, the non-performing loans or delinquent loans of universal and commercial banks declined by 3 percent to P86.78 billion as of end-May 2010 from P89.25 billion during the same month last year.

On the other hand, the total loan portfolio, or the total amount of outstanding loans from universal and commercial banks, expanded by 6.3 percent to reach P2.57 trillion as of end-May 2010 from P2.42 billion a year ago.

These developments have significant implications. First, the decline in delinquent loans and the increase in loan portfolio reduced the ratio of non-performing or bad loans to the banks’ total loan portfolio. According to the Bangko Sentral report, this ratio, called NPL ratio, stood at 3.37 percent as of end-May 2010, down from 3.69 percent as of end-May 2010.

The Bangko Sentral noted that the NPL ratio of universal and commercial banks had been below 4 percent for the past 20 months.

Second, the decline in the amount of delinquent loans means that borrowers are paying their obligations on time, so there is less default. This improves the borrowers’ credit rating, and serves as an assurance that they will have access to further loans in the future.

Third, when borrowers pay their obligations on time, banks are able to use such payments to extend more loans. With more funds available for lending, the law of supply and demand dictates that interest rates go down. This factor, together with the Bangko Sentral’s strategy of keeping its own lending rates (to the banks) low, makes consumer loans, such as for cars and homes, affordable and thus attractive.

The continuing improvement of the economy, beginning with the better-than-expected 7.3 percent growth during the first quarter, is expected to support the low-interest environment this year and sustain the banks’ lending activities, both for the industrial and commercial sector as well as for consumers.

Banks are already projecting robust profits for this year as a result of lending activities, notwithstanding the low interest rates they charge. Loan volume more than make up for the lower margins.

Profits, in turn, allow banks to be more aggressive in lending. Competition encourages banks to offer not only lower interest rates but also better payment terms such as longer maturities, to attract borrowers. This competition is more apparent in consumer lending – for household appliances, gadgets, cars and real estate.

In simple terms, the developments in the loan market means that people who in the past had to set aside plans to take out loans even for dream homes because of the high charges are now able to afford loans to realize their dreams.