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Bank Lending Standards Unchanged in Q2 2010

07.30.2010

The BSP released today the results of the Q2 2010 Senior Bank Loan Officers’ Survey, which indicated that, overall, banks had basically unchanged credit standards for the fifth consecutive quarter. However, comparing the number of respondents declaring tighter credit standards to those that indicated the opposite (diffusion index[1]), the survey results provided the following: For loans to enterprises, the survey indicated an overall decline in the net tightening of credit standards. For loans to households, there was a further net tightening, due mainly to a decline in banks’ risk tolerance for all types of loans to consumers.

The survey consists of questions related to the general credit standards of commercial banks in the Philippines, as well as factors affecting the credit supply of and demand for loans by 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.                    

Enterprises

With regard to firm size, the net tightening of credit standards declined for small and medium as well as micro enterprises, consistent with the overall picture. However, the net tightening of credit standards increased for top corporations and large middle market enterprises.

Respondent banks’ specific credit standards[2] showed an easing of standards on loan margins for all firm sizes. Credit lines were increased for top corporations and large middle market enterprises. Looking at the external and bank-specific factors affecting banks’ credit standards, the picture was mixed. Overall, expectations about general economic activity and industry-specific outlook contributed to a decline in net tightening of credit standards in Q2 2010 compared to the preceding review quarter. Meanwhile, while banks’ liquidity positions remained generally sound, the cost of their capital position and less competition from other banks resulted in a net tightening of credit standards, which was a reversal of the results in the previous quarter.

Households

Banks had basically unchanged credit standards for the fifth consecutive quarter for household loans. However, comparing the number of respondents declaring tighter credit standards to those that indicated the opposite, there was an increase in the net tightening of credit standards across all types of household loans, i.e., housing, credit card, auto, and personal loans.

Respondent banks’ specific credit standards indicated a bigger number of respondents reporting a narrowing of loan margins overall as well as for most types of loans, specifically housing, credit card, and personal loans. Respondents reported unchanged credit lines. Collateral requirements (except for housing loans) also remained the same in Q2 relative to the previous quarter for all types of loans.

Loan demand

The survey results also pointed to a stronger increase in net demand[3] for loans from enterprises compared to the previous quarter. Demand increased across all firm sizes. Among the more important reasons for the stronger increase in net demand for loans by enterprises appeared to be their improved economic outlook going forward, lower interest rates, and improved terms of financing by banks.

For housing loans, the increase in net demand was likewise stronger, due mainly to strong demand for housing loans, which was consistent with improving consumer confidence.

The increase in net demand for loans is consistent with the growth in bank lending.

Commercial banks’ loans accounted for around 86 percent of the banking system’s total outstanding loans.  Survey questions were sent to 35 commercial banks, with 29 banks responding, for a response rate of 83 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 (price-based); 2) collateral requirements; 3) loan covenants; 4) size of credit lines; and 5) length of loan maturities, which are all non-price conditions. 
 [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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