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Bank Lending Standards Remain Steady in Q1 2010

05.19.2010

The BSP released the results of its Q1 2010 senior bank loan officers’ survey. The survey consists of questions related to general credit standards of commercial banks in the Philippines, as well as factors affecting credit supply and demand of both enterprises and households. The BSP has been conducting this survey since Q1 2009 to enhance the BSP’s understanding of banks’ lending behavior, which is an important indicator of the strength of economic activity. The survey also helps the BSP assess the effectiveness of bank lending as a transmission channel of monetary policy. 

Results of the survey indicated that banks have generally maintained steady credit standards for loans to enterprises since Q2 2009. Most respondents have been reporting basically unchanged credit standards since Q2 2009 after reporting some tightening in Q1 2009 in the immediate aftermath of the peak of the global financial crisis. The trend is also consistent with the sustained growth in bank lending to productive sectors in the last five quarters. Similar results were obtained for the household sector, with most respondent banks reporting basically unchanged credit standards in the last four survey quarters.

In the current Q1 2010 survey, responses to questions related to credit standards were analyzed by looking at the percentage difference (“diffusion index”) between banks reporting that credit standards have been tightened and those reporting that they have been eased1  .  This is the first time that the BSP is using the diffusion index approach in interpreting the results of the survey.  Previous to this survey, the BSP looked only at the mode of responses, i.e., the number of banks that tightened, loosened, or maintained credit standards. Applying the diffusion index approach to the previous senior bank loan officers’ surveys showed that the net tightening of credit standards has generally been declining since Q2 2009. This implies that the series of policy rate reductions by the BSP was not diluted as credit standards were broadly steady.

Insofar as lending to enterprises is concerned, increased competition among banks was the major factor cited by respondents as the reason for the reduced net tightening of credit standards. Risks related to expectations about economic activity made a relatively smaller contribution to the net tightening of credit standards  to loans to enterprises compared to the previous quarter. By size of enterprises (i.e., top corporations, large middle market enterprises, small and medium enterprises (SMEs), and micro enterprises), the survey indicated that based on specific credit standards,2   loan margins were significantly reduced and collateral requirements were not tightened for top corporate loan accounts. Large middle market enterprises also reflected the same trend, but at a lesser magnitude compared to top corporations.   In contrast, there was an increase in loan margins and a tightening of loan covenants for SMEs and micro enterprises.

Insofar as lending to households is concerned, increased competition among banks as well as improved economic conditions were the main factors behind the lower net tightening of credit standards for the household segment. This is evident from the easing of collateral requirements and larger credit lines for housing and personal loans, and lower loan margins for auto loans compared to Q4 2009.

On the demand side, the net demand 3    for loans has been positive for both enterprises and households in the past quarters, indicating that more banks reported an increase in loan demand relative to those that reported a decrease. For households, however, net demand, although positive, has been declining for the last two quarters. This confirms the observation that funding needs of enterprises and households have increased since the financial crisis.

In the current survey, banks cited low interest rates, attractive terms of financing, and increased cash flow projections of borrowers as the factors behind the increase in net demand for loans for both enterprises and households.

Commercial banks’ loans account for around 86 percent of the banking system’s total outstanding loans.  Survey questions were sent to 35 commercial banks, with 22 banks responding, for a response rate of 63 percent.   

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1  A positive diffusion index indicates that more banks tightened credit standards compared to those that eased (“net tightening”), whereas a negative diffusion index indicates that more banks eased credit standards compared to those that tightened (“net easing”).

2    The survey questionnaire identified five specific credit standards, namely changes in 1) loan margins; 2) collateral requirements; 3) loan covenants; 4) size of credit lines; and 5) length of loan maturities. 

 3     “Net demand” refers to the percentage difference between banks reporting an increase in loan demand and banks reporting a decrease. Net demand will therefore be positive if more banks reported an increase in loan demand compared to those saying the opposite, whereas it will be negative if more banks reported a decrease in loan demand compared to those reporting an increase. 

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