Banks continue to tighten lending standards

Published October 22, 2021, 11:38 AM

by Lee C. Chipongian

The Bangko Sentral ng Pilipinas’ (BSP) latest Senior Bank Loan Officers’ Survey (SLOS) showed a net tightening of banks’ overall credit standards for both households and enterprises loans.

The results of the third quarter SLOS indicate that banks continued to be risk-averse in their lending mainly due to the slow recovery of credit on weak economic prospects and deterioration in borrower profiles, according to BSP Governor Benjamin E. Diokno.

BSP Governor Benjamin E. Diokno

“(The) continued monetary policy support remains crucial in supporting private demand and encouraging banks to lend and thereby allow the economic recovery to gain more traction,” said Diokno on Thursday, Oct. 21, during the BSP presentation of the third quarter inflation report.

Based on the SLOS, which uses two methods to assess the results, majority of surveyed banks kept their overall credit standards as per the modal approach. However, based on diffusion index (DI), there is a net tightening of overall credit standards for loans to enterprises and households.

BSP’s Department of Economic Research Deputy Director Lara Romina Ganapin, who presented the SLOS, said that using the modal approach, 70.8 percent of surveyed banks have unchanged overall credit standards during the quarter.

With the DI-based method, it showed a net tightening of lending standards across top corporations, large middle-market enterprises, small and medium enterprises, and micro enterprises. They point to the deterioration in the profiles of borrowers and in the profitability of banks’ portfolio, as well as a less favorable economic outlook and a reduced tolerance for risk for the net tightening results.

“On specific credit standards, the net tightening of overall credit standards was evident in terms of reduced credit line sizes, stricter collateral requirements and loan covenants,” said the BSP. The increased use of interest rate floors is also a factor. “However, some form of easing in lending standards was identified in terms of longer loan maturities,” it added.

For the next quarter, the BSP said banks “generally anticipate unchanged overall credit standards for loans to businesses.” But, continued uncertain economic outlook, a deterioration of borrowers’ profiles and in the liquidity of banks’ portfolio, and banks’ decreased tolerance for risk could still lead to a net tightening of credit standards.

As for lending to households, about 69.4 percent of surveyed banks also said they have unchanged overall credit standards. For DI-based results, a net tightening was indicated particularly for housing, auto, and personal/salary loans. For credit card loans, there was an easing in lending standards.

“For specific credit standards, the overall net tightening of credit standards to households was manifested in reduced credit line sizes, stricter loan covenants, and collateral requirements,” said the BSP. It also noted some partial easing of lending standards for consumer loans as seen in the narrower loan margins and longer loan maturities.

The survey results showed that 75 percent of banks said they have steady overall credit standards for commercial real estate loans (CRELs), based on the modal approach.

As for the DI-based approach, there was again a noted net tightening which has been consistent for the last 23 quarters, said the BSP. “Banks mentioned a decreased tolerance for risk, deterioration in borrowers’ profile, and a more uncertain economic outlook as significant factors to the tightening of overall credit standards for CRELs” in the third quarter.

The net tightening of overall lending standards for CRELs was attributed to 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.

For households’ housing loans, the BSP said 71.9 percent of surveyed banks said they have unchanged lending standards while the DI-based approach noted a net tightening.

Generally, the SLOS said loan demand for the third quarter was steady for both businesses and consumers.

“The slight net increase in loan demand from enterprises was induced by the increased inventory financing needs of clients and accounts receivable as well as the improvement in customers’ economic outlook,” said the BSP. The lower household consumption, banks’ less attractive financing terms, and higher interest rates were identified as “main elements that influenced the reported fall in overall consumer loan demand.”

For the fourth quarter, the BSP said majority of surveyed banks expect “generally steady loan demand” from consumers and businesses because of improvement in market sentiment with the faster deployment of COVID-19 vaccines.

The quarter-on-quarter analysis used in SLOS, first introduced in 2009, helps the BSP to have a “better understanding of banks’ lending behavior which is an important indicator of the strength of credit activity in the country.”

The latest SLOS was participated by 64 banks, of which 42 are large lenders and 22 are thrift banks.

 
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