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Bank Lending Standards Slightly Tighter for Firms, Unchanged for Households in Q1 2012

05.04.2012

The BSP released today the results of the Q1 2012 Senior Bank Loan Officers’ Survey, which showed an overall slight net tightening of credit standards for loans to enterprises after being unchanged in the previous quarter, based on the diffusion index approach.1,2  Meanwhile all banks indicated unchanged overall credit standards for household loans for the second consecutive quarter.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 19 banks responding, representing a response rate of 55.9 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 banks’ cautious view on the outlook of the economy and of certain industries amid the still uncertain global economic prospects, perceived decreased access to market financing, and reduced tolerance for risk and stricter financial system regulations.

By firm size, the results of the survey showed a slight net tightening of credit standards applied to top corporations, consistent with previous quarter’s survey results showing that banks expected a slight tightening of overall credit standards for these enterprises. Meanwhile, banks’ responses indicated unchanged credit standards for large middle-market, small and medium-sized, and micro enterprises in Q1 2012.

Looking at specific credit standards,5  the overall slight net tightening is evident in the stricter loan covenants and greater use of interest rate floors6  by banks, particularly for top corporations. Meanwhile, survey results for Q1 2012 continued to show larger credit lines provided to enterprises since Q2 2010 and longer loan maturities, particularly for top corporations. Banks’ responses also indicated a net narrowing of loan margins for large middle-market and small/medium enterprises, while loan margins for top corporations were unchanged after narrowing for the past five consecutive quarters. Banks’ standards on collateral requirements, on the other hand, have remained unchanged since Q3 2011.

In terms of expectations, respondent banks see a further tightening of credit standards across all types of loans to enterprises over the next quarter.

Lending to Households
 
The survey results indicated unchanged overall credit standards for loans to households for the second consecutive quarter.7 The stable asset portfolio and steady economic outlook of banks, as well as unchanged financial system regulations and bank tolerance for risk, and stable profile of borrowers were cited by the respondents as being behind the unchanged overall credit standards for loans to households during the quarter.

With regard to specific types of household loans, banks’ responses showed unchanged credit standards for auto and personal/salary loans since Q3 2011. Meanwhile, banks’ credit standards for credit card loans appeared to have tightened slightly while those for housing loans eased somewhat in Q1 2012.

In terms of specific credit standards for loans to households, survey responses indicated unchanged standards for loan margins, although credit line sizes have been slightly reduced. The survey results also showed some net easing of standards on collateral requirements, loan covenants, and loan maturities but indicated an increased use of interest rate floors, particularly for housing loans.

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

Loan Demand

The survey results also pointed to unchanged overall demand8  for loans from enterprises, with the percentage of banks reporting an increase in demand for loans during the quarter offsetting the percentage indicating otherwise. The stable demand for enterprise loans during the quarter was attributed to the relatively stable interest rates, unchanged financing terms of banks, availability of other sources of funds and steady customer financing needs, customer accounts receivable financing, and economic outlook of banks.

Banks’ responses showed that demand for household loans, particularly for housing loans, increased generally, supported by lower interest rates and more attractive financing terms of banks during the quarter.

The overall positive net change in demand for household loans and the stable demand for business loans were consistent with available data showing strong bank lending growth during the first two months of Q1 2012.

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

Respondent banks reported unchanged overall credit standards for commercial real estate loans in Q1 2012 relative to Q4 2011. In terms of specific credit standards, banks’ responses indicated unchanged loan margins, credit line sizes, and loan maturities. Meanwhile, survey results also indicated slight net tightening of standards on collateral requirements and loan covenants, and greater use of interest rate floors. Among the important reasons cited for the unchanged credit standards for commercial real estate loans were the banks’ steady economic outlook along with the unchanged asset portfolio of banks and firm tolerance for risk. Respondent banks’ loan-to-value ratios were also steady during the quarter. Moving forward, respondent banks’ expect a slight easing of credit standards for commercial real estate loans owing to expectations of continued loan demand. Banks also reported unchanged demand for commercial real estate loans in Q1 2012 given clients’ steady outlook on the economy and relatively stable interest rate environment.

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1 A positive diffusion index (DI) for credit standards indicates that more banks have tightened their credit standards compared to those that eased (“net tightening”), whereas a negative DI for credit standards 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 twelfth 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 September 2011, commercial banks’ loans accounted for around 86.3 percent of the banking system’s total outstanding loans. Meanwhile, the banks that responded to the Q1 2012 survey accounted for 67.9 percent of the total universal and commercial bank loans for February 2012.

5 The survey questionnaire identified six specific credit standards: (1) loan margins (price-based); (2) collateral requirements; (3) loan covenants; (4) size of credit lines; (5) length of loan maturities; and (6) interest rate floors. 

6 An interest rate floor refers to a minimum interest rate for loans. Greater use of interest rate floor implies tightening while less use indicates otherwise.

7 Loans extended to households include: (1) housing loans; (2) credit card loans; (3) auto loans; and (4) personal/salary loans.

8 “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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