Banks maintain steady credit standards in Q4 2021

Banks’ overall credit standards are “generally unchanged” in the last quarter of 2021 but there was an easing for household or consumer loans during the period, according to the latest Bangko Sentral ng Pilipinas (BSP) survey.

The BSP said results of the fourth quarter or Q4 2021 Senior Bank Loan Officers’ Survey (SLOS) using the modal approach indicated that most banks maintained their overall credit standards for loans to both enterprises and households. In the modal approach, the results of the survey are analyzed by looking at the option with the highest share of responses.

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However, based on the diffusion index (DI) approach, the BSP said there was a net tightening to the lending standards of business loans while there was a net easing of overall credit standards for household loans. Under the DI model, a net tightening indicates a positive DI for credit standards which means more banks tightened their credit standards rather than easing it. A net easing is a negative DI or more banks have eased their credit standards compared to those that tightened.

Based on the latest SLOS, about 75 percent of 50 surveyed banks said the have “generally unchanged” overall credit standards for loans to enterprises. Using the DI-based method, it showed a net tightening across top corporations, large middle-market enterprises, small and medium enterprises, and micro enterprises.

The tightening of overall credit standards was attributed to the deterioration in the profitability of bank’s portfolio and borrowers’ profile, and a reduced tolerance for risk, among others.

“However, the diffusion indices indicating a net tightening of credit standards are notably lower across all firm sizes, suggesting that the extent of tightening of credit standards in Q4 2021 has decreased compared to previous quarters,” said the BSP.

Stricter collateral requirements and loan covenants as well as increased use of interest rate floors are indications of the tightening of lending standards to enterprises. But, the BSP also noted “some form of easing” such as narrower margin on loans and longer loan maturities.

Most banks expect that the first quarter 2022 will be the same due to less favorable economic outlook and deterioration of borrower’s profile, said the BSP.

The BSP said lending to households also had an overall unchanged credit standards in the fourth quarter 2021. About 65.7 percent of banks surveyed – using the DI approach – showed a net easing of overall credit standards for household loans, specifically for housing, credit card, and personal/salary loans due to more favorable economic outlook and an improvement in borrower’s profile.

Lending standards’ net easing are in terms of longer loan maturities and decreased use of interest rate floors. There was some “partial tightening” for household loans such as wider loan margins, reduced size of credit lines as well as stricter collateral requirements and loan covenants, said the BSP.

The first quarter 2022, using the modal approach, showed that most banks will retain their overall credit standards.

About 75.8 percent of surveyed banks said they also did not change the lending standards for commercial real estate loans (CRELs) in the fourth quarter 2021.

Based on the DI approach, banks still indicated a net tightening and this was trend for the last 24 quarters. “During the quarter, respondent banks conveyed a declined tolerance for risk, deterioration in borrowers’ profile, and a less favorable outlook as key elements to the tightening of overall credit standards for CRELs,” said the BSP.

A net tightening when it comes to CREALs mean wider loan margins, reduced credit line sizes, stricter collateral requirements and loan covenants, increased use of interest rate floors, and shortened loan maturities, noted the BSP.

As far as loan demand, the BSP said most banks said demand for CREALs are unchanged and consistent, based on the modal approach. The DI-based results showed a slight net decline in demand for CRELs “given the decreased investment in plant or equipment of clients and the deterioration in customers’ economic outlook.”

For the first three months of 2022, demand for CRELs are not expected to change while some banks anticipate higher demand because of the market’s positive economic outlook, increased customer inventory and accounts receivable financing needs.

Another 71.9 percent of banks said housing loans experienced steady lending standards in the last quarter of 2021 while DI-based results also showed expectations of net easing in credit standards for housing loans, driven by less uncertain economic outlook, and improvement in borrowers’ profile, said the BSP.

Overall, the SLOS said loan demand for enterprises, household and real estate loans are steady, based on the modal approach.

The DI-based results, meantime, showed a net increase in overall demand for business loans across all major loan categories particularly for top corporations, large middle-market firms, small and medium enterprises, and micro-enterprises. For consumer loans, it is housing loans, credit card loans and auto loans that showed steady demand, said the BSP.

Anticipation of improved economic outlook and the rise in customers’ financing requirements for inventory and accounts receivable are reasons for the increase in loan demand for enterprises. The higher households consumption, bank’s more attractive financing terms, and lower interest rates are factors for the expected steady rise in consumer loans.

For first quarter 2022, the BSP said a “considerable portion” of surveyed banks expect a net increase in demand business and household loans “amid the market’s optimistic economic outlook due to the easing of COVID-19 quarantine restrictions and the continued rollout of vaccines.”

“Results from the DI method reflected expectations of a net rise in overall loan demand from businesses which were mainly associated with clients’ improvement in economic outlook as well as increased inventory and accounts receivable financing needs,” the BSP added. “Similarly, the DI approach manifested banks’ anticipation of net increase in overall consumer loan demand which was attributed to banks’ more attractive financing terms and higher household consumption,” it said.

The BSP’s SLOS help the Monetary Board to have a clearer understanding of banks’ lending behavior. Credit activity is one of the most important indicator in monitoring the conditions of asset markets and the “overall strength of bank lending as a transmission channel of monetary policy.”

The latest SLOS was conducted on Nov. 29, 2021 until Jan. 11 this year.