Banks continue tight lending standards – BSP survey


Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno said banks continue to tighten credit standards for enterprises and household loans amid uncertain economic recovery and elevated number of COVID-19 cases.

“The uncertain outlook on the economy, the deteriorating profile of borrowers, and the lower risk tolerance of banks have also led to the net decrease in overall loan demand across all types of loans, save for housing which reflected a slight net increase in demand,” said Diokno, citing the latest results of the Senior Bank Loan Officers’ Survey (SLOS).

“Nevertheless, over the next quarter, most of the respondent banks anticipate broadly steady overall loan demand from both enterprises and households, indicating a somewhat optimistic view amid the anticipated increase in availability of COVID-19 vaccines in the country,” added Diokno.

Diokno also said that mobility restrictions due to the stricter containment measures implemented in the Greater Manila Area or NCR Plus for the last three weeks will “exert an impact on the country’s economic performance in the first half of the year.”

“Weak credit activity was also observed as households and businesses deferred consumption and capital expansion while risk aversion continued to be felt in the banking sector,” he said.

Based on the first quarter SLOS, conducted March 1 to April 8, most banks maintained their overall lending standards based on the modal approach, but using the diffusion index (DI) approach, it showed continued net tightening of overall credit standards.

BSP Director for the Department of Economic Research, Dennis D. Lapid noted that loan demand for the first quarter this year was steady for both enterprises and households but DI-based results indicated a net decrease in overall loan demand except for housing loans which had a slight net increase in demand.

He said the net decrease in loan demand from businesses was because of customers not-so-good economic outlook amid the pandemic. Businesses also have reduced need for inventory financing and accounts receivable financing, as well as lower investment in plant or equipment.

The lower household consumption and housing investment were major factors that contributed to the observed decline in overall household loan demand, said Lapid.

Loan demand in the next quarter, according to SLOS, are broadly steady indicating an optimistic view from firms and consumers amid the anticipated availability of the vaccine.

Lending to enterprises in the first quarter, based on the modal approach, indicated that 66 percent of the 51 surveyed banks during the quarter had unchanged overall credit standards. The DI-based results showed a net tightening for all borrower firm sizes, specifically, top corporations, large middle-market enterprises, small and medium enterprises, and micro enterprises, said the BSP. Deterioration in borrower profiles, reduced tolerance for risk, and less favorable economic outlook, among other factors, were cited.

“Under specific credit standards, the net tightening of overall credit standards was reflected in reduced credit line sizes; stricter collateral requirements and loan covenants; and increased use of interest rate floors,” said BSP. “On the other hand, some form of easing was shown in terms of narrower loan margins and longer loan maturities.”

The SLOS said 75 percent of surveyed banks said lending to households have the same overall credit standards compared to the previous quarter. Taken from the DI-based results, banks had a net tightening of overall credit standards for household loans specifically for housing, auto, and personal/salary loans.

“The general net tightening of credit standards for household loans was revealed in reduced credit line sizes as well as stricter loan covenants and collateral requirements. Nonetheless, easing of credit standards for loans to households was partly observed in terms of narrower loan margins and longer loan maturities,” said the BSP.

As for commercial real estate loans (CRELs), most banks reported broadly unchanged overall credit standards based on modal approach. DI-based approach showed continued net tightening for the last 21 quarters in a row.

“Respondent banks quoted a less favorable economic outlook, a lower tolerance for risk, as well as deterioration in borrowers’ profile as the main contributors to the tightening of overall credit standards for CRELs,” said the BSP.

The BSP also attributed CRELs’ net tightening of overall credit standards on the wider loan margins, reduced credit line sizes, stricter collateral requirements and loan covenants, increased use of interest rate floors, and shortened loan maturities.

For housing loans extended to households, about 67.7 percent of surveyed banks said they did not change their credit standards while DI-based results showed net tightening.

The SLOS, conducted since 2009, is used by BSP to better understand banks’ lending behavior as an “important indicator of the strength of credit activity in the country.”  The survey reviews credit demand, prevailing conditions in asset markets, and the overall strength of bank lending as a transmission channel of monetary policy, said the BSP.