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Bank Lending Standards Remain Broadly Steady in Q3 2013

11.15.2013

Results of the Q3 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 based on the modal approach.1  This is the 18th consecutive quarter starting Q2 2009 that most banks reported broadly unchanged credit standards (see Chart 1).

Based on the diffusion index (DI) approach,2,3  however, a net tightening of overall credit standards for loans to enterprises was noted in Q3 relative to the previous quarter, with the DI recorded at 3.6 percent. Meanwhile, the DI approach pointed to a slight easing of overall credit standards for loans to households with the DI at -5.3 percent.4 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 showed a slight 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.5 Survey questions were sent to all commercial banks,6 with 30 banks responding, or a response rate of 85.7 percent.7 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 (89.3 percent of banks that responded to the question) indicated that they generally maintained their credit standards for loans to enterprises during the quarter using the modal approach. However, based on the DI approach, credit standards for loans to enterprises showed net tightening. Banks that indicated tighter credit standards cited the deterioration in profitability and reduced liquidity of banks’ asset portfolio as well as lower tolerance for risk as the main factors that drove the tightening. In particular, some banks reported stricter loan covenants for large middle-market and small and medium enterprises (SMEs) as well as more stringent collateral requirements for loans to micro enterprises.8 Some banks also reported increased use of interest rate floors for loans to SMEs.

By borrower firm size, overall credit standards for large middle-market enterprises and SMEs showed a net tightening, based on the DI approach, after being unchanged in the previous quarter. Similarly, overall credit standards for micro enterprises continued to show a slight net tightening for the fifth consecutive quarter. Meanwhile, overall credit standards for top corporations were unchanged following a slight net easing in the previous quarter.

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 tightening of credit standards for loans to businesses (except large middle-market enterprises) was higher compared to those expecting the opposite. A more uncertain economic outlook along with expectations of stricter financial system regulations and reduced tolerance for risk was cited by respondent banks as key reasons behind the expected tightening of credit standards.

Lending to Households
 
Using the modal approach, the survey results likewise showed that most of the respondent banks (84.2 percent) continued to report unchanged credit standards for loans extended to households. The DI approach, however, indicated a slight net easing of credit standards on the back of improved profitability of banks’ asset portfolio, more aggressive competition from banks and non-bank lenders, increased tolerance for risk, and improved profile of borrowers. In particular, banks reported less use of interest rate floors for housing loans along with unchanged loan covenants and loan maturities for all types of household loans.

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

Most of the respondent banks foresee maintaining their credit standards over the next quarter. However, some banks expect overall credit standards to tighten slightly given expectations of a deterioration in profitability and reduced liquidity of banks’ asset portfolio and a more uncertain economic outlook, among other things.

Loan Demand

Responses to the question on loan demand showed that the majority of the respondent banks continue to see unchanged overall demand for loans from both enterprises and households. Using the DI approach, however, a net increase in overall demand10 for loans from both enterprises and households was observed. 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 as well as lower interest rates. Meanwhile, the net increase in demand for household loans was due to higher household consumption and housing investment, lower interest rates, and more attractive financing terms offered by banks.

The net increase in loan demand for both business and household loans were reflected in the robust bank lending growth during the quarter.

Looking ahead, most of the respondent banks expect demand for credit from firms to increase further in the next quarter on expectations of increased working capital needs, higher accounts receivables, and lower interest rates. For loans to households, most of the respondent banks expect unchanged loan demand over the next quarter. However, a larger proportion of respondents expect demand for household loans to increase further in the next quarter relative to those who indicated the opposite on expectations of higher household consumption and housing investment as well as more attractive financing terms of banks.

Special Questions on Commercial Real Estate Loans

Most of the respondent banks (87.5 percent) indicated unchanged overall credit standards for commercial real estate loans using the modal approach. However, based on the DI approach, a net tightening of overall credit standards was noted for commercial real estate loans for the fifth consecutive quarter in Q3 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, reduced credit line sizes, stricter collateral requirements and loan covenants, shorter loan maturities, and lower loan-to-value ratios for commercial real estate loans.

Demand for commercial real estate loans was also unchanged in Q3 2013. A number of banks, however, indicated increased demand for the said type of loans given clients’ improved economic outlook, lower interest rates, and increased working capital needs.

For the next quarter, most of the respondent banks expect to maintain their credit standards for commercial real estate loans. However, banks that anticipate 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 anticipate a generally steady loan demand, a number of banks are of the view that demand for commercial real estate loan will continue to increase in the next quarter.

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1 In the modal approach, the results of the survey are analyzed by looking at the option with the highest share of responses.
2 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”). 
3 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.
4 The slight easing of overall credit standards for loans to households 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.
5 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.
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. 
7 As of June 2013, U/KB loans accounted for around 86.3 percent of the banking system’s total outstanding loans.
8 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.
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.

View  Table 1  |  Table 2  |  Chart 1  |  Chart 2

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