Results of the Q2 2013 Senior Bank Loan Officers’ Survey (SLOS) showed that most of the respondent banks maintained their credit standards for loans to both enterprises and households during the quarter. This is the 17th consecutive quarter starting Q2 2009 that most banks reported broadly unchanged credit standards (see Chart 1).
Based on the diffusion index (DI) approach,1,2 however, a minimal net easing of overall credit standards for loans to both enterprises and households relative to the previous quarter was noted with the DI recorded at -6.9 percent and -4.8 percent, respectively.3 The details of the DI computation are found in Table 1 (see also Chart 2). In the previous quarter, credit standards for both business and household loans also showed a minimal net easing using the DI approach.
The survey consists of questions on loan officers’ perceptions relating to the overall credit standards of universal/commercial banks (U/KBs) in the Philippines, as well as to factors affecting the supply of and demand for loans by both enterprises and households.4 Survey questions were sent to all commercial banks,5 with 33 banks responding, or a response rate of 94.3 percent.6 The analysis in the survey is based on comparisons with data for the immediately preceding quarter. The BSP has been conducting the SLOS 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 (86.2 percent of banks that responded to the question) indicated that they generally maintained their credit standards for enterprises during the quarter. However, a few banks eased their credit standards for enterprises, citing improvements in the profile of borrowers and profitability of banks’ asset portfolio, and an increased deposit base as main factors that contributed to the easing. Respondents’ more favorable outlook on the domestic economy and certain industries, more aggressive competition from other banks as well as from non-bank lenders, along with higher tolerance for risk also underpinned some banks’ easing view. In particular, some banks reported increased credit line sizes, less strict collateral requirements, longer loan maturities, and reduced use of interest rate floors across all firm sizes, except in the case of micro enterprises.7
In terms of borrower firm size, the proportion of respondent banks that reported easing credit standards for top corporations remained low but was higher than those indicating the opposite for the fourth consecutive quarter. Said result matches the net easing indicated by responding banks in the previous quarter. Meanwhile, overall credit standards for large middle-market enterprises and small and medium enterprises (SMEs) were unchanged after showing a slight net easing in the previous quarter. For micro enterprises, however, banks’ responses continued to show a slight net tightening of overall credit standards for the fourth consecutive quarter based on the DI approach.
For the next quarter, most of the respondent banks expect 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, except micro enterprises, was higher compared to those expecting otherwise. Expectations of improved profitability and liquidity of banks’ asset portfolios, increased deposit base, and more aggressive competition from other banks and from non-bank lenders were cited by said respondent banks as factors behind the potential easing of standards.
Lending to Households
The survey results likewise showed that most of the respondent banks (85.7 percent) reported unchanged credit standards for loans extended to households. Meanwhile, a number of banks indicated easing of overall credit standards for household loans on the back of improved profiles of borrowers and profitability of the asset portfolios of banks, more aggressive competition in lending, and banks’ increased tolerance for risk. In particular, banks reported a net reduction in the use of interest rate floors for housing loans. Some banks indicated unchanged loan maturities for all types of household loans along with unchanged collateral requirements and loan covenants for credit card and auto loans.
With regard to specific types of household loans,8 banks’ responses indicated a slight net easing of credit standards for personal/salary loans for the fifth consecutive quarter. Meanwhile, credit standards for housing, credit card, and auto loans were unchanged based on the DI approach.
Most of the respondent banks foresee maintaining their credit standards over the next quarter. However, some banks expect overall credit standards to ease slightly given expectations of improved profitability in the asset portfolio of banks and more favorable economic outlook.
Responses to the question on loan demand showed that a majority of the respondent banks are seeing unchanged overall demand for loans from both enterprises and households. Using the DI approach, however, a net increase in overall demand9 for loans from both enterprises and households was noted. For loans to businesses, the net increase in loan demand was attributed by banks to higher accounts receivable financing and working capital needs of borrower firms. Meanwhile, the net increase in demand for household loans reflected lower interest rates, more attractive financing terms of banks, and higher housing investment.
Indications of higher loan demand for both business and household loans were consistent with monthly data showing robust bank lending growth during the quarter.
Looking ahead, a larger proportion of respondent banks expect demand for credit from both firms and households to increase further in the next quarter relative to those who indicated otherwise. This was attributed largely to expectations of increased accounts receivable financing and working capital needs of borrower firms for the following quarter amid the sustained low interest rate environment. Similarly, the expected net increase in households’ demand for credit could be traced largely to the continued increase in household consumption, as well as low interest rates and banks’ more attractive financing terms.
Special Questions on Commercial Real Estate Loans
Most of the respondent banks (82.4 percent) also indicated unchanged overall credit standards for commercial real estate loans. However, banks reporting tighter overall credit standards for commercial real estate loans outnumbered those indicating the opposite for the fourth consecutive quarter in Q2 2013. The net tightening of overall credit standards for commercial real estate loans was attributed by respondent banks to stricter oversight of banks’ real estate exposure along with banks’ reduced tolerance for risk. In particular, banks reported wider loan margins and reduced credit line sizes for commercial real estate loans. Banks’ responses likewise showed unchanged collateral requirements, loan covenants, loan maturities, and use of interest rate floors, as well as steady loan-to-value ratios during the quarter.
Demand for commercial real estate loans was also unchanged in Q2 2013, but a number of banks indicated increased demand for the said type of loans given clients’ improved economic outlook, increased inventory financing needs, banks’ more attractive financing terms, and lower interest rates.
For the next quarter, most of the respondent banks are expected to maintain their credit standards for commercial real estate loans. However, banks that expected a tightening of their credit standards outnumbered those expecting the opposite. In terms of demand for this type of loan, although 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.
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. Beginning Q1 2013, the BSP used both the modal and DI approaches in assessing the results of the survey.
3 The slight easing of overall credit standards indicated by banks’ responses since the Q4 2012 survey round does not necessarily reflect on the effectiveness of prudential regulation and banking supervision in the Philippines. Various indicators point to the continued resiliency of the Philippine banking system.
4 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.
5 Of the 36 universal/commercial banks (U/KBs), only 35 banks are included in the survey because one bank requested not to be included in the survey since it does not engage in corporate and retail lending.
6 As of December 2012, U/KB loans accounted for around 86.3 percent of the banking system’s total outstanding loans.
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 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.
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