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Bank Lending Standards Remain Generally Steady in Q1 2013

05.27.2013

Results of the Q1 2013 Senior Bank Loan Officers’ Survey showed that overall credit standards were generally steady as most of the respondent banks maintained their credit standards for loans to both enterprises and households during the quarter. Most banks indicated generally unchanged bank credit standards for the sixteenth consecutive quarter starting Q2 2009, based on the percentage of responding banks indicating whether they tightened, loosened, or maintained their credit standards.

Based on the diffusion index (DI) approach, a minimal net easing of overall credit standards for loans to both enterprises and households relative to the previous quarter was noted with a DI of -9.7 percent and -4.2 percent, respectively. 1,2  The details of the DI computation are found in Table 1. In the previous quarter, credit standards for both business and household loans also showed a minimal net easing following the DI approach.

The survey consists of questions on perceptions relating to the overall credit standards of universal/ commercial banks (U/KBs) in the Philippines, as well as factors affecting the supply of and demand for loans by both enterprises and households.3  All of the 35 U/KBs included in the survey4 responded to the Q1 2013 survey, representing a 100-percent response rate.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, which is an important indicator of the strength of credit activity in the country. The survey also helps the BSP assess the robustness of demand conditions, potential risks in the asset markets, and possible strains in the bank lending channel as a transmission channel of its monetary policy.

Lending to Enterprises

Most banks continue to indicate generally unchanged credit standards for enterprises.6  However, a few banks eased their credit standards for enterprises citing an improved profile of borrowers and profitability of banks’ asset portfolio, a more favorable outlook on the domestic economy, and an increased deposit base of banks as important factors that contributed to the easing. In particular, some banks reported less strict loan covenants and longer loan maturities across all types of business loans. Banks’ responses also indicated narrower loan margins, increased credit line sizes, and less strict collateral requirements, except in the case of micro enterprises. Meanwhile, some banks appeared to have reduced the use of interest rate floors, particularly for top corporations and micro enterprises.7

In terms of borrower firm size, the percentage of respondent banks that reported easing credit standards for top corporations and large middle-market enterprises remained low but was higher than those indicating the opposite for the fourth and third consecutive quarter, respectively. Overall credit standards for small and medium enterprises (SMEs) also showed a slight net easing after being unchanged in the previous quarter. Meanwhile, credit standards for micro enterprises continued to show a slight net tightening, consistent with the expected net tightening indicated by banks’ responses in the previous quarter.

Over the next quarter, most of the respondent banks expected credit standards for loans to enterprises to remain unchanged. However, the percentage of banks foreseeing a slight easing of credit standards for loans across all firm sizes was higher compared to those expecting otherwise. Those responding banks cited expectations of an improvement in the profitability and liquidity of banks’ asset portfolio as factors behind the potential easing of standards.

Lending to Households
 
The survey results likewise showed most of the respondent banks reporting unchanged credit standards for loans extended to households.8  However, some banks indicated a slight easing of credit standards for household loans in Q1 2013 for the third consecutive quarter on the back of improved profitability of banks’ asset portfolios, more aggressive competition from banks and non-bank lenders, increased tolerance for risk, and improved profile of borrowers. In particular, a few banks reported increased credit line sizes for the fourth consecutive quarter. Some of the respondent banks also indicated longer maturities and reduced use of interest rate floors for housing loans, while collateral requirements and loan covenants were unchanged, except for auto loans. Banks’ responses also reflected a net widening of loan margins for all types of household loans.

With regard to specific types of household loans,9  banks’ responses indicated a slight net easing of standards for housing and personal/salary loans, but unchanged credit standards for credit card and auto loans based on the DI approach.

Most of the respondent banks foresee maintaining their credit standards over the next quarter. However, some banks expect credit standards across all types of household loans to ease further given expectations of improved profitability in the asset portfolio of banks, more favorable economic outlook, and increased tolerance for risk.

Loan Demand

The survey results also showed a net increase in overall demand10  for loans from both enterprises and households. For loans to businesses, the net increase in loan demand was attributed by banks to increased accounts receivable financing and working capital needs. Meanwhile, the net increase in demand for household loans reflected higher housing investment and household consumption, lower interest rates, and banks’ more attractive financing terms.

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

Looking ahead, a large fraction of respondent banks expect demand for credit from both firms and households to increase further in the next quarter owing largely to expectations of increased accounts receivable financing and working capital needs of borrowers in the following quarter amid the sustained low interest rate environment. Similarly, the expected net increase in households’ demand for credit was due largely to the continued increase in household consumption and housing investment as well as low interest rates and banks’ more attractive financing terms.

Special Questions on Commercial Real Estate Loans

Most of the respondent banks also indicated unchanged overall credit standards for commercial real estate loans.11 However, banks reporting tighter overall credit standards for commercial real estate loans outnumbered those indicating the opposite for the third consecutive quarter in Q1 2013. The net tightening of overall credit standards for commercial real estate loans reflected a deterioration in the liquidity and profitability of banks’ asset portfolio as well as in the profile of borrowers along with reduced tolerance for risk. In particular, a few banks reported wider loan margins, stricter collateral requirements and loan covenants, and increased use of interest rate floors for commercial real estate loans was higher compared to the proportion of banks indicating otherwise. Some of the respondent banks also reported increased credit line sizes and longer loan maturities for this type of loan. Meanwhile, respondent banks’ loan-to-value ratios remained steady during the quarter.

At the same time, demand for commercial real estate loans in Q1 2013 showed a net increase given clients’ improved economic outlook, increased accounts receivable financing needs, lower interest rates, and banks’ more attractive financing terms.

For the next quarter, most of the respondent banks are expected to maintain their credit standards for commercial real estate loans. Meanwhile, banks that expected easing of credit standards outnumbered those expecting the opposite. In terms of demand for this type of loan, while most of the respondent banks foresee generally steady loan demand, a number of banks expect demand for commercial real estate loan to continue to increase in the next quarter.

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1  In the diffusion index approach, a positive diffusion index (DI) for credit standards indicates that the proportion of banks that have tightened their credit standards are greater 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 From Q1 2010 to Q4 2012 survey rounds, the BSP used largely the DI approach in the analysis of survey results.
3  This is consistent with the surveys of bank lending standards of other central banks, namely, the US Federal Reserve, the European Central Bank, the Bank of England, the Bank of Canada, and the Bank of Japan.
4 Out of the 36 universal/commercial banks, only 35 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 June 2012, commercial banks’ loans accounted for around 85.9 percent of the banking system’s total outstanding loans.
6 Of the banks that responded to the question on the change in overall credit standards for loans to enterprises, 90.3 percent reported that they maintained their credit standards during the quarter.
7 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. A loan covenant is an agreement or stipulation laid down in loan contracts, particularly contracts with enterprises, under which the borrower pledges either to take certain action (an affirmative covenant), or to refrain from taking certain action (a negative covenant); this is consequently part of the terms and conditions of the loan. Meanwhile, 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 Of the banks that responded to the question on the change in overall credit standards for loans to households, 87.5 percent reported unchanged credit standards during the quarter.
9 Loans extended to households include: (1) housing loans; (2) credit card loans; (3) auto loans; and (4) personal/salary loans.
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 Of the banks that responded to the question on the change in overall credit standards for commercial real estate loans, 85.7 percent reported that they maintained their credit standards during the quarter.

View  Table 1  |  Table 2 (Q1 2011 - Q1 2013)  |  Table 3 (Q1 2009 - Q4 2010)

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