Banks’ lending standards unchanged in 2020

Published January 21, 2021, 6:11 PM

by Lee C. Chipongian

Banks have maintained their credit or lending standards during the first pandemic year, according to a survey regularly conducted by the Bangko Sentral ng Pilipinas (BSP).

Based on the BSP’s fourth quarter 2020 Senior Bank Loan Officers’ Survey (SLOS), majority of banks did not change their overall credit standards for loans to both enterprises and households as per the modal approach, one of two models used by the BSP, the other one being the diffusion index (DI).

 “The latest survey results reflected a slight improvement compared to the third quarter 2020 survey where almost half of the respondent banks stated that they tightened credit standards amid the continued economic and business disruptions caused by the ongoing COVID-19 pandemic,” said the BSP.

Using the DI approach, this showed a net tightening of overall credit standards in the last quarter of 2020 compared to the July-September survey of that year.

The latest SLOS, consolidated between November 25 and January 11 this year,  noted that 63.4 percent of banks surveyed said they have unchanged overall credit standards for loans to enterprises under the modal approach, and based on the DI results, there was still net tightening of lending standards across all borrower such as top corporations, large middle-market enterprises, small and medium enterprises, and micro enterprises, said the BSP.

“As indicated by respondent banks, the observed tightening of overall credit standards was largely due 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,” said the BSP.

The BSP noted that net tightening of overall credit standards because of the following: reduced credit line sizes; stricter collateral requirements and loan covenants; and increased use of interest rate floors, it added. There was easing as well in terms of narrower loan margins and longer loan maturities.

For next quarter, the BSP said banks still see unchanged overall credit standards based on modal approach. From DI-based results, tighter standards could be expected with the uncertain economic outlook, the expected deterioration in borrowers’ profiles and profitability of banks’ portfolios, and banks’ lower tolerance for risk, added the BSP.

In lending to households, using the modal approach, about 77.8 percent of surveyed banks said they have maintained their overall credit standards. The  

DI model resulted to a net tightening of overall credit standards particularly for housing and personal/salary loans.

The BSP said banks were concerned about the uncertain economic outlook, a deterioration in borrowers’ profile, and reduced tolerance for risk. In the meantime, DI-based results showed unchanged credit standards for credit card and auto loans.

“In terms of specific credit standards, the overall net tightening of credit standards for loans to households was revealed in reduced credit line sizes and stricter loan covenants (while) some easing of credit standards for loans to households was also observed in terms of narrower loan margins, less restrictive collateral requirements, longer loan maturities, and decreased use of interest rate floors,” said the BSP.

The SLOS indicated that over the next quarter, banks still expect to keep their overall credit standards unchanged based on the modal approach, and a tighter overall credit standards for household loans based on the DI model.

The BSP said loan demand is expected to remain steady for bank loan for enterprises. But banks’ view on household loan demand “varied widely,” said the BSP. “DI-based results generated mixed results in the fourth quarter 2020 as the overall loan demand for businesses pointed to a net increase (specifically for top corporations) while loan demand from households conveyed a net decline across all types of consumer loans,” explained the BSP.

The SLOS assessment of commercial real estate loans (CRELs) also showed “broadly” unchanged overall credit standards while DI-based results continued to indicate a net tightening of overall credit standards for CRELs for the 20th consecutive quarter, said the BSP.

The BSP said banks attributed the less favorable economic outlook, a lower tolerance for risk, as well as deterioration in borrowers’ profile as the major contributors to the tightening of overall credit standards for CRELs.

On specific credit standards, the net tightening of overall credit standards for CRELs continued to reflect wider loan margins, reduced credit line sizes, stricter collateral requirements and loan covenants, increased use of interest rate floors, and shortened loan maturities, according to the BSP.

The BSP launched the SLOS in 2009 to get a “better understanding of banks’ lending behavior, which is an important indicator of the strength of credit activity in the country.”

The SLOS helps the BSP to monitor credit demand and asset markets’ prevailing conditions.