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Bank Lending Declines Slightly in August

10.24.2001

The volume of outstanding loans of commercial banks reached P1.4 trillion as of end-August 2001. At this level, bank lending dropped slightly by 0.3 percent from the level a year ago.

Bank lending to the wholesale and retail trade, electricity, gas and water and community, social and personal services sectors showed continued year-on-year growth since January 2001. On the other hand, bank lending to the other sectors fell in August from their levels a year ago. Reduced borrowing activities in the manufacturing, financial institutions, real estate and business services (FIREBS), as well as the transportation, storage and communication sectors contributed mainly to the overall decline in commercial bank lending.

In terms of sectoral allocation, P746.0 billion or more than half of the total loans outstanding of commercial banks, was channeled to the manufacturing and the FIREBS sectors.

The sluggishness in bank lending activity can be traced, in part, to the slowdown in business activities particularly, in the manufacturing sector due to continued weakness in external conditions. This is reflected in the decline in the volume of production index of key manufacturing enterprises by 2 percent in July from the level a year ago. The observed increase in the leverage ratios of manufacturing firms could have also prompted these firms to temper their borrowing activities. Based on a sample of selected manufacturing firms listed with the Philippine Stock Exchange, a majority reported an increase in debt to equity ratio in July 2001 compared to the previous year’s level. The presence of spare capacity has likewise dampened demand for loans. For July 2001, the average capacity utilization rate of key manufacturing firms was at 79.7 percent, only slightly higher than the 77.7 percent in the previous month.

The recent cut in the BSP’s policy rates is expected to contribute to lower bank lending rates. This, in turn, should help bring down the cost of borrowings and encourage increased bank lending activities. Given the favorable outlook on food supply, softening world oil prices and broad stability in the exchange rate, the decline in interest rates should help revitalize activity in the real sector without fueling inflationary pressures.

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