The central bank’s Senior Bank Loan Officers’ Survey (SLOS) for the third quarter showed banks continue to indicate “tighter” and unchanged overall credit standards for loans to enterprises and households.
The SLOS reported that for loans to enterprises, the banks that have tighter lending standards was only slightly higher than those that said there was no change at all in their lending standards.
For loans to households, the percentage of surveyed banks that maintained an overall credit standards was only slightly higher than banks that said theirs have become tighter in the July to September period.
Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno said on Thursday that despite the gradual reopening of businesses as lockdown measures are relaxed, “risk aversion among banks persists owing mainly to the unpredictable nature of the pandemic.”
“As the results of our latest SLOS will show, banks have continued to adopt stringent lending standards in part to avoid the further escalation of non-performing loans that can threaten their financial sustainability,” said Diokno.
“This has contributed to a slowdown in bank lending to businesses and households in the most recent quarters. Nonetheless, the continued reopening of the economy should incrementally boost loan demand in the next quarters as capital requirements of businesses increase in anticipation of the economy’s sequential recovery,” he added.
Diokno also said the recent easing measures since March and restoration of economic activity would allow more effective transmission of monetary policy to the wider economy. "We are confident in the soundness and resilience of the banking sector, as capital adequacy ratios have stayed above the prescribed standards,” he said.
Department of Economic Research Deputy Director Lara Romina Ganapin, who presented the SLOS during the BSP quarterly inflation briefing, said the results for the third quarter survey showed fewer banks reporting tighter credit standards compared to the previous survey where more than half of the banks said that they tightened credit standards amid the implementation of stricter quarantine measures due to the COVID-19 pandemic in the second quarter or the months April to June.
But the SLOS, which employs two methods of interpreting the survey results - the modal approach and the diffusion index (DI) approach -showed that based on the DI, there was a net tightening of overall credit standards for both loans to enterprises and households in the third quarter which was the same in the second quarter.
The DI further showed that about 47.4 percent of banks surveyed said lending to enterprises showed a net tightening while 45.5 percent reported unchanged overall credit standards. A net tightening means a positive DI which indicates that the proportion of respondent banks that have tightened their credit standards exceeds those that eased, resulting to a net tightening. A net easing is a negative DI.
“The net tightening of credit standards was also reflected across all borrower firm sizes, specifically, top corporations, large middle-market enterprises, small and medium enterprises, and micro enterprises,” said the BSP. Banks attributed the tightening of credit standards to less favorable economic outlook, deterioration in the profitability of bank’s portfolio and profiles of borrowers, and reduced tolerance for risk, among other factors. “In terms of specific credit standards, the net tightening of overall credit standards was manifested in terms of reduced credit line sizes; stricter collateral requirements and loan covenants; and increased use of interest rate floors. Meanwhile, some form of easing was observed in terms of narrower loan margins and longer loan maturities,” noted the BSP.
About 50 percent of banks surveyed said lending to households were generally unchanged in the third quarter. DI-based results “showed a net tightening of credit standards for household loans as observed across all types of consumer loans, namely, housing, credit card, auto, and personal/salary loans. (These) banks cited less favorable economic outlook, a deterioration in borrowers’ profile, and a reduced tolerance for risk as the key factors that contributed to the overall tightening of credit standards for loans to households,” said the BSP. A net tightening of credit standards for household loans would come as reduced credit line sizes, stricter collateral requirements and loan covenants, and increased use of interest rate floors.
The SLOS include real estate loans and it noted that 50 percent of surveyed banks said they have tightened their overall credit standards for commercial real estate loans (CRELs) while the other 50 percent said they have not and it was still unchanged.
Going by DI-based results, the BSP has recorded a net tightening of overall credit standards for CRELs for the 19th consecutive quarter.
“Respondent banks cited a less favorable economic outlook, deterioration in borrowers’ profile and profitability of banks’ portfolio as well as reduced tolerance for risk as the major reasons for the tightening of overall credit standards for CRELs,” said the BSP. Specifically, a net tightening of overall credit standards for commercial real estate loans means reduced credit line sizes, stricter collateral requirements and loan covenants, wider loan margins, shortened loan maturities, and increased use of interest rate floors.
The BSP said banks have “mixed responses” when it comes to demand for business and consumer loans in the third quarter which was still in a COVID-19 general community quarantine lockdown.
“Most of the respondent banks observed an unchanged overall demand for loans from enterprises (while) the majority of respondent banks reported a decline in loan demand from households during the quarter. Similarly, DI-based results manifested mixed trends as the overall loan demand from enterprises pointed to a net increase (specifically for top corporations), while loan demand from households registered a net decline across all types of household loans,” said the BSP.
The SLOS surveyed 64 banks, of which 42 are big banks and 22 are thrift banks. The response rate was 75 percent which means only 48 banks sent in their replies. The survey period was September 2 to October 13.