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Bank Lending Standards Unchanged for Firms and Households in Q3 2012

11.09.2012

The BSP released today the results of the Q3 2012 Senior Bank Loan Officers’ Survey, which showed overall unchanged credit standards for loans to both enterprises and households.1,2   The previous quarter survey found that credit standards for business loans were unchanged while those for loans to households eased slightly.3 

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 all commercial banks,4 with 28 banks responding, representing a response rate of 77.8 percent..5 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 overall unchanged lending standards for loans to firms, with the number of banks that indicated a tightening of their credit standards equal to the number of banks that indicated an easing. Results reflected the perceived stable asset portfolio of banks as well as banks’ generally steady outlook on the economy and on certain industries, unchanged financial system regulations, and banks’ unchanged tolerance for risk.

In terms of borrower firm size, the results of the survey showed slight net easing of credit standards for top corporations and large middle-market enterprises while credit standards for micro and small and medium enterprises (SMEs) appeared to have tightened slightly on account of more uncertain economic prospects for these firms.

The overall unchanged credit standards for enterprises can also be traced to unchanged standards on collateral requirements along with steady maturities of loans provided to enterprises.6   Meanwhile, banks’ responses indicated a net narrowing of loan margins (except for micro enterprises) and increased credit line sizes across all firm sizes. The results also showed overall tighter standards on loan covenants and increased use of interest rate floors.7 

Over the next quarter, respondent banks expect unchanged credit standards for enterprises (except for SMEs) given expectations of stable asset portfolio of banks, steady outlook on the economy and certain industries as well as unchanged tolerance for risk.

Lending to Households
 
Survey results likewise pointed to unchanged overall credit standards for loans to households in Q3 2012. This was attributed largely to perceived stable asset portfolio of banks and their steady outlook on the economy.

With regard to specific types of household loans,8  banks’ responses indicated unchanged standards on credit card loans. On the other hand, survey results showed a slight easing of credit standards for housing and personal/salary loans while responses on credit standards for auto loans continued to show a net tightening for the second consecutive quarter, reflecting stricter standards in terms of collateral requirements.

Survey results showed unchanged standards on loan covenants, loan maturities, collateral requirements (except for auto loans), and loan margins (except for auto and personal/salary loans). Meanwhile, banks’ responses indicated increased credit line sizes, particularly for housing and credit card loans, and less use of interest rate floors for housing and auto loans.

Over the next quarter, banks’ responses indicated some easing of credit standards on the whole, although those for credit card and auto loans are seen to tighten slightly in the near term. Respondent banks attribute the expected overall easing of standards on household loans to more aggressive competition from banks and non-bank lenders, the improvement in borrowers’ profile as the economy continues to expand, and better performance of asset portfolio of banks.

Loan Demand

The survey results also pointed to increased overall demand9   for loans from both enterprises and households (particularly housing loans). For loans to businesses, the higher loan demand was attributed to lower interest rates, an improved economic outlook, and increased accounts receivable financing and working capital needs. Meanwhile, the increased demand for household loans reflected higher household consumption, lack of other sources of funds, banks’ more attractive financing terms, and lower interest rates.

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

Looking ahead, respondent banks expect demand for credit from both businesses (except micro enterprises) and households (except credit card and auto loans) to continue to increase in the next quarter. Banks foresee an increase in loan demand from businesses owing largely to expectations of increased accounts receivable financing and working capital needs of borrowers in the next quarter. Similarly, the likely overall increase in households’ demand for credit was due largely to the increase in household consumption, lower income prospects, lower interest rates, and lack of other sources of funds.

Special Questions on Commercial Real Estate Loans

Respondent banks reported slight tightening of overall credit standards for commercial real estate loans in Q3 2012 after being unchanged for the past four quarters. This can be attributed to banks’ reduced tolerance for risk, less aggressive competition, deterioration in asset portfolio of respondent banks, and stricter financial system regulations. In terms of specific credit standards, responses pointed to stricter collateral requirements and loan covenants for commercial real estate loans along with unchanged loan maturities and credit line sizes. Results also showed narrower loan margins and less use of interest rate floors for this type of loan. Meanwhile, respondent banks’ loan-to-value ratios were steady during the quarter. Demand for commercial real estate loans in Q3 2012 appeared to be unchanged given clients’ steady working capital and accounts receivable financing needs amid steady flow of internally-generated funds as well as banks’ unchanged financing terms and relatively stable interest rates. Moving forward, respondent banks’ expect a slight tightening of credit standards for commercial real estate loans and a slight decline in demand for the said type of loan.

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1  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”). 
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 fourteenth consecutive quarter starting Q2 2009, based on the percentage of responding banks indicating whether they tightened, loosened, or maintained their credit standards.
4 Out of the 37 universal/commercial banks, only 36 banks are included in the survey because one bank requested not to be included in the survey given a loan portfolio that is dominated by loans to its own employees.
5 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 Q3 2012 survey accounted for about 81.6 percent of the total outstanding loans of universal and commercial banks for August 2012.
6 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.  
7 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.
8 Loans extended to households include: (1) housing loans; (2) credit card loans; (3) auto loans; and (4) personal/salary loans.
9 “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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