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Banks Keep Lending Standards for Enterprises and Households Unchanged in Q4 2011

02.03.2012

The BSP released today the results of the Q4 2011 Senior Bank Loan Officers’ Survey, which showed overall unchanged credit standards for loans to enterprises, based on the diffusion index approach, 1,2 given the equal number of banks that indicated tightening and easing of their lending standards during the quarter. This followed the slight net tightening observed in the previous two quarters. Meanwhile, all respondent banks indicated unchanged credit standards for loans to households in Q4 2011 after two consecutive quarters of slight net easing.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 34 commercial banks, with 24 banks responding, representing a response rate of 70.6 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 unchanged credit standards for loans to enterprises reflected the banks’ steady outlook on the general economy and certain industries amid more uncertain global economic prospects, stable asset portfolio, and unchanged tolerance for risk.

With regard to firm size, the results of the survey showed mixed results as credit standards for top corporations and micro enterprises indicated a slight net tightening while banks’ responses showed a slight net easing in standards for large middle-market firms and small and medium-sized enterprises in Q4 2011.

In terms of specific credit standards,5  survey results for Q4 2011 continued to show narrower loan margins along with increased credit lines for the fourth consecutive quarter, particularly for top corporations and large middle-market enterprises. Survey results have also 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 were unchanged since Q3 2011 while standards on loan covenants showed a slight net tightening in the fourth quarter after being unchanged in the previous quarter. Loan maturities appeared to have lengthened for top corporations but slightly shortened for large middle-market and small and medium enterprises. Meanwhile, banks’ responses indicated an overall slight tightening in terms of the use of interest rate floors for loans to businesses, specifically for top corporations and large middle-market enterprises.

Moving forward, respondent banks expect a slight net tightening over the next quarter of overall credit standards, particularly for top corporations and large middle-market enterprises. This was confirmed by some banks already indicating somewhat tightening of credit standards for top corporations and micro enterprises in Q4 2011.

Lending to Households
 
The survey results indicated unchanged credit standards across all types of loans to households, following an overall net easing observed in the past two quarters.6  The unchanged view of respondent banks on the economy, stable asset portfolio of banks and unchanged tolerance for risk and profile of borrowers contributed to the unchanged credit standards for loans to households during the quarter.

In terms of specific credit standards for loans to households, survey responses indicated unchanged standards on collateral requirements, loan covenants, and loan maturities across all types of household loans. Meanwhile, banks’ responses showed a slight widening of loan margins for housing loans, increase in credit lines for housing and auto loans, and less use of interest rate floors for personal/salary loans.

Over the next quarter, banks indicated that credit standards would likely remain unchanged for credit card and auto loans while those for housing and personal/salary loans would likely ease somewhat in the near term.

Loan Demand

The survey results also pointed to a sustained increase in demand7 for loans from enterprises (except micro enterprises) and households (except auto loans). For loans to businesses, the net increase in demand for loans was attributed by banks to increased customers’ inventory and accounts receivable financing needs as well as the relatively low interest rates. On the other hand, the attractive terms of financing offered by banks, the relatively low interest rates, as well as higher housing investment of households contributed to the increase in demand for household loans 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 Q4 2011 for which data are available.

Looking ahead, respondent banks expect demand for credit from both businesses and households to continue to increase in the next quarter.

Special Questions on Commercial Real Estate Loans

All respondent banks reported unchanged overall credit standards for commercial real estate loans in Q4 2011 relative to Q3 2011. In terms of specific credit standards, banks’ responses indicated a slight net tightening of standards on the size of credit lines, collateral requirements, and use of interest rate floors. Meanwhile, standards on loan covenants have been unchanged while loan maturities were longer. Among the important reasons cited for the unchanged credit standards for commercial real estate loans were the banks’ stable economic outlook along with the stable asset portfolio of banks and unchanged tolerance for risk. Respondent banks’ loan-to-value ratios were steady during the quarter. Banks also reported increased demand for commercial real estate loans in Q4 2011 given clients’ steady outlook on the economy and relatively stable interest rate environment.

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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 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. 
3 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.
4 As of March 2011, commercial banks’ loans accounted for around 85.5 percent of the banking system’s total outstanding loans. Meanwhile, the banks that responded to the Q4 2011 survey accounted for 63.3 percent of the total universal and commercial bank loans for November 2011.
5 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.  
6 Loans extended to households include: (1) housing loans; (2) credit card loans; (3) auto loans; and (4) personal/salary loans.
7 “Diffusion index (DI) for loan demand” refers to the percentage difference between banks reporting an increase in loan demand and banks reporting a decrease. A positive DI for loan demand indicates that more banks reported an increase in loan demand compared to those stating the opposite, whereas a negative DI for loan 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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