Due to a reduced risk tolerance, banks have tightened their lending standards in the second quarter this year – breaking 44 quarters in a row of unchanged credit standards – amid low loan demand while the country is still implementing lockdown measures and the economy has yet to fully reopen.
This is the first time that banks, both the large banks and thrift lenders, have tightened their credit standards since mid-2009, when the Bangko Sentral ng Pilipinas (BSP) started its Senior Bank Loan Officers’ Survey (SLOS).
Based on the results of the second quarter SLOS, the 51 surveyed banks tightened their overall credit standards for loans to both enterprises and households, and real estate sector, using the two approaches employed by the BSP which is the modal approach and the diffusion index (DI). The modal interpretation analyses results by the highest share of responses while the DI has a positive (or net tightening) and negative (or net easing) indications.
During Monday’s BSP virtual media briefing, Acting Deputy Director for the Department of Economic Research, Lara Romina E. Ganapin, said that based on both the modal and DI approaches – “(the results) indicated that overall, respondent banks tightened their lending standards in the second quarter, for loans to both enterprises and households, as well as to real estate loan borrowers, amid the implementation of quarantine measures in the country to fight the spread of COVID-19.”
Ganapin said that while results also marked the first time that the majority of respondent banks reported tighter credit standards after 44 consecutive quarters of “broadly unchanged” credit standards, she also noted that results of the SLOS “pointed to a decline in overall loan demand in the second quarter based on both the modal and DI approaches.”
Banks noted a decrease in the overall demand for loans from both enterprises and households in the second quarter. The SLOS report said that the overall net decrease in loan demand was due to these factors: the deterioration in clients’ business prospects amid the lockdown; and decline in customer inventory financing needs and working capital requirements attributed in turn to delay in investment plans in plant or equipment.
The surveyed banks also cited lower household consumption and housing investment as major reasons for the overall net decrease in household loan demand during the period.
In the third quarter however, banks expect improvement in the loan demand, especially for business loans across al firm sizes. They also expect increase in demand for credit card and personal/salary loans – “reflecting in part expectation for pick up in domestic economic activity following the partial re-opening of the economy.”
The SLOS, which was conducted June 1 to July 7, showed that about 69.4 percent of banks reported tighter overall credit standards for loans to enterprises during the quarter.
“The overall tightening of credit standards was also noted across all borrower firm sizes, namely, top corporations, large middle-market enterprises, small and medium enterprises, and micro-enterprises, as indicated by both modal- and DI-based results. Respondent banks attributed the tightening of credit standards largely to less favorable economic outlook, deterioration in the profiles of borrowers, and banks’ reduced tolerance for risk, among other factors,” said the BSP.
The net tightening of overall credit standards meant there was reduced credit line sizes, stricter collateral requirements and loan covenants. There was also increased use of interest rate floors, said the BSP. “Nonetheless, results also showed some net easing in terms of narrower loan margins (across all firm sizes) and longer loan maturities (particularly for loans to large-middle market enterprises, SMEs, and micro-enterprises).”
In the third quarter, SLOS results said banks think there will be continued tightening of overall credit standards because of the following: more uncertain economic outlook; expected deterioration in borrowers’ profiles as well as worsening of industry- or firm-specific outlook; and banks’ lower tolerance for risk.
As for lending to households, about 60.6 percent of surveyed banks reported a tightening of overall credit standards for all types of consumer loans such as housing, credit card, auto, and personal/salary loans.
“Respondent banks cited less favorable economic outlook, a reduced tolerance for risk, and a deterioration in borrowers’ profile and profitability of banks’ portfolios as major factors that contributed to the tightening of credit standards for loans to households,” said the BSP.
“In terms of specific credit standards, the overall net tightening of credit standards for loans to households was manifested in reduced credit line sizes; stricter collateral requirements and loan covenants; and increased use of interest rate floors by respondent banks. However, some form of easing of credit standards was also noted in terms of narrower loan margins (across all types of loans to households) and longer loan maturities (specifically for housing, auto, and personal/salary loans),” the BSP added.
About 55.6 percent of surveyed banks, in the meantime, reported that overall credit standards for commercial real estate loans (CRELs) tightened in the second quarter.
The SLOS indicated that banks noted less favorable economic prospects and a deterioration of borrowers’ profiles during the quarter. “In terms of specific credit standards, the net tightening of overall credit standards for commercial real estate loans reflected wider loan margins, reduced credit line sizes, stricter collateral requirements and loan covenants, increased use of interest rate floors, and shortened loan maturities,” said the BSP. As for housing loans to households, about 60 percent of banks also had a tightening of their credit standards. The BSP said majority of the respondent banks “expect overall credit standards for housing loans to tighten over the next quarter amid more uncertain economic prospects, deterioration in borrowers’ profile, and lower risk tolerance of banks.”