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Bank Lending Standards Unchanged for Firms, Ease Slightly for Households in Q2 2012

08.17.2012

The BSP released today the results of the Q2 2012 Senior Bank Loan Officers’ Survey, which showed overall unchanged credit standards for loans to enterprises while credit standards for household loans eased slightly.1,2  In the previous quarter, credit standards for business loans appeared to have tightened slightly while those for loans to households were unchanged. 

The survey consists of questions on the overall 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 36 commercial banks, with 30 banks responding, representing a response rate of 83.3 percent.  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. This is an important indicator of the strength of credit activity in the country, a key determinant of domestic economic growth. The survey also helps the BSP assess the effectiveness of bank lending as a transmission channel of monetary policy.

Lending to Enterprises

The latest diffusion index showed unchanged lending standards for loans to firms, with the number of banks that indicated tightening equal to the number of banks that indicated easing standards. Results indicated that this reflected banks’ generally steady outlook on the economy and on certain industries, their unchanged tolerance for risk, and perceived stable asset portfolio of banks.

In terms of borrower firm size, the results of the survey showed unchanged credit standards for top corporations and micro enterprises, consistent with the overall perception. Meanwhile, banks’ responses indicated a slight net easing of credit standards for large middle-market and small and medium-sized enterprises in Q2 2012.

The overall unchanged credit standards for enterprises can also be traced to unchanged standards on collateral requirements (except for loans to large middle-market enterprises) and loan covenants (except for loans to top corporations).  The data likewise indicated less use of interest rate floors  and increased credit line sizes across all firm sizes. Loans with longer maturities were also provided to enterprises, except for micro enterprises. At the same time, banks’ responses showed a continued net narrowing of loan margins for top corporations and large middle-market enterprises.

Over the next quarter, respondent banks foresee an overall slight easing of credit standards for enterprises.

Lending to Households
 
The slight easing of overall credit standards for loans to households in Q2 2012 was attributed to increased competition among banks and non-bank lenders (e.g., savings and loan associations and pawnshops), banks’ increased tolerance for risk, and improved profile of borrowers.

With regard to specific types of household loans,8 banks’ responses indicated a slight easing of credit standards for credit card and personal/salary loans, in line with the overall easing of credit standards for household loans. On the other hand, banks’ credit standards for housing loans were unchanged while those for auto loans appeared to have tightened slightly.

Survey results showed larger credit lines for all types of household loans and less use of interest rate floors for auto and personal/salary loans. Meanwhile, banks’ responses indicated unchanged standards on collateral requirements and loan covenants but wider loan margins for all types of household loans, except for housing loans. Loan maturities were also unchanged for housing, credit card, and personal/salary loans.

Over the next quarter, banks expect credit standards to ease further for housing, credit card, and personal/salary loans. Meanwhile, those for auto loans are seen to tighten slightly in the near term.

Loan Demand

The survey results also pointed to increased overall demand10  for loans from both enterprises and households (except credit card loans). For loans to businesses, the higher loan demand was attributed to an improved economic outlook, lower interest rates, and increased working capital needs. Meanwhile, the increased demand for household loans can be traced largely to banks’ more attractive financing terms and lower interest rates.

The overall positive net change in demand for both household and business loans was consistent with data showing robust bank lending growth during the quarter.

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 for the fourth consecutive quarter in Q2 2012. This can be attributed to their stable outlook on the economy and on certain industries or firms, unchanged tolerance for risk, and perceived stable asset portfolio of banks. Similarly, respondent banks’ loan-to-value ratios were steady during the quarter. In terms of specific credit standards, responses pointed to unchanged standards on collateral requirements and credit line sizes for commercial real estate loans. Banks’ responses likewise showed narrower loan margins, easing standards on loan covenants, longer loan maturities, and less use of interest rate floors for this type of loan. Banks also reported increased demand for commercial real estate loans in Q2 2012 given clients’ increased working capital and accounts receivable financing needs and banks’ more attractive financing terms. Moving forward, respondent banks’ expect a slight easing of credit standards for commercial real estate loans.11  

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In the diffusion index approach, 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”). 
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. 
Meanwhile, most banks indicated generally unchanged bank credit standards for the thirteenth consecutive quarter starting Q2 2009, based on the percentage of responding banks indicating whether they tightened, loosened, or maintained their credit standards.
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 Q2 2012 survey accounted for about 70 percent of the total outstanding loans of universal and commercial banks for June 2012.
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.  
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.
Currently, the survey does not include a question on the factors considered by banks regarding their outlook for credit standards for enterprises for the next quarter.
Loans extended to households include: (1) housing loans; (2) credit card loans; (3) auto loans; and (4) personal/salary loans.
Currently, the survey does not include a question on the factors considered by banks regarding their outlook for credit standards for households for the next quarter.
10 “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.
11 Currently, the survey does not include a question on the factors considered by banks regarding their outlook for credit standards for commercial real estate loans for the next quarter.

View  Table  1  |  Table 2

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