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Bank Lending Standards for Enterprises Show Slight Net Tightening While Those for Households Indicate Slight Net Easing in Q3 2011

11.04.2011

The BSP released today the results of the Q3 2011 Senior Bank Loan Officers’ Survey, which showed an overall net tightening of credit standards for loans to enterprises, particularly for top corporations, based on the diffusion index approach.1  By contrast, credit standards for loans to households showed overall net easing in Q3 2011 relative to the previous quarter, reflecting easing standards for housing loans.2,3

The survey consists of questions related to the general credit standards of commercial banks in the Philippines, as well as factors affecting the supply of and demand for loans by both enterprises and households. Survey questions were sent to 35 commercial banks, with 18 banks responding, or a response rate of 51.4 percent.4  The analysis in the survey is based on comparisons with data for the immediately preceding quarter. The BSP has been conducting this survey since Q1 2009 to enhance its understanding of banks’ lending behavior, which is an important indicator of the strength of domestic economic activity. The survey also helps the BSP assess the effectiveness of bank lending as a transmission channel of monetary policy.


Lending to Enterprises

The overall net tightening of credit standards for loans to enterprises reflected the banks’ less optimistic outlook on the general economy and certain industries amid uncertainties brought about by adverse external developments during the quarter. The net tightening of credit standards for enterprises in Q3 2011 was also attributed by respondent banks to financial system regulations and banks’ reduced tolerance for risk as well as the degree of competition from other banks and non-bank lenders.

With regard to firm size, survey results indicated a net tightening of credit standards for top corporations, consistent with the overall net tightening of credit standards.5  Meanwhile, all of the respondent banks reported unchanged credit standards for large middle-market, small and medium, and micro enterprises.

In terms of specific credit standards,6  loan maturities appeared to have shortened across firm sizes, except micro enterprises, reflecting more subdued economic prospects. However, banks reported narrower loan margins and increased credit lines, particularly for top corporations and large middle-market enterprises in Q3 2011. Survey results have been showing a net narrowing of loan margins since Q4 2010 on the back of a generally stable interest rate environment while the size of credit lines has been increasing since Q2 2010. Banks’ standards on collateral requirements and loan covenants were unchanged for all firm sizes.

Lending to Households
 
The survey results indicated a slight net easing of credit standards for loans to households,7 reflecting the net easing of credit standards for housing loans.8  Meanwhile, all respondent banks reported unchanged credit standards for credit card, auto, and personal/salary loans. The steady view of respondent banks on the financial system regulations and access to market financing contributed to the unchanged credit standards for credit card, auto, and personal/salary loans during the quarter.

In terms of specific credit standards, survey responses, however, indicated easing loan margins, particularly for housing and auto loans. Banks’ responses also show increased credit lines and longer loan maturities for housing loans.

Loan demand

The survey results also pointed to a sustained positive net change in demand9  for loans from enterprises (except micro enterprises) and households. The net increase in demand for loans from both enterprises and households could be traced to upbeat expectations of borrower firms about the general economic activity, the favorable interest rate environment, higher cash flow requirements, and lack of other sources of financing. The favorable terms of financing offered by respondent banks also contributed to the increased demand for loans from households during the review quarter.
 
The overall positive net change in demand for corporate and household loans was consistent with the strong bank lending growth during the first two months of Q3 2011 for which data are available.

Special questions on commercial real estate loans

As in the previous quarter, the Q3 2011 survey round included specific questions on commercial real estate loans for the BSP to have a better sense of banks’ views on the property sector. All respondent banks reported unchanged credit standards (except loan margins which showed net widening) for commercial real estate loans in Q3 2011 relative to Q2 2011. Similarly, banks’ loan-to-value ratios were steady during the quarter. Banks also reported unchanged demand for commercial real estate loans in the third quarter.

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1  A positive diffusion index indicates that more banks have tightened their credit standards compared to those that eased (“net tightening”), whereas a negative diffusion index indicates that more banks have eased their credit standards compared to those that tightened (“net easing”). 
2  Meanwhile, most banks indicated generally unchanged bank credit standards for the tenth consecutive quarter starting Q2 2009, based on the percentage of responding banks indicating whether they tightened, loosened, or maintained their credit standards.
3  Prior to the Q1 2010 survey, the BSP looked only at the mode of responses in interpreting the results of the survey, i.e., the number of banks that tightened, loosened, or maintained credit standards. Since Q1 2010, the BSP started analyzing the results of the survey by looking at the percentage difference (“diffusion index”) between banks reporting that credit standards have been tightened and those reporting that they have been eased. 
4  As of December 2010, commercial banks’ loans accounted for around 85.5 percent of the banking system’s total outstanding loans. Meanwhile, the banks that responded to the Q3 2011 survey accounted for 67.6 percent of the total universal and commercial bank loans for August 2011.
5  One bank reported tighter credit standards for top corporations in Q3 2011 relative to the previous quarter.
6  The survey questionnaire identified five specific credit standards: (1) loan margins (price-based); (2) collateral requirements; (3) loan covenants; (4) size of credit lines; and (5) length of loan maturities.  
7  Loans extended to households include: (1) housing loans; (2) credit card loans; (3) auto loans; and (4) personal/salary loans.
8  One bank reported easing of credit standards for housing loans.
9  “Net change in demand” refers to the percentage difference between banks reporting an increase in loan demand and banks reporting a decrease. A positive net change in demand indicates that more banks reported an increase in loan demand compared to those stating the opposite, whereas a negative net change in demand implies that more banks reported a decrease in loan demand compared to those reporting an increase.

View  Table 1  | Table 2

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