Results of the Q4 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 19th consecutive quarter starting Q2 2009 that most banks reported broadly unchanged credit standards (see Chart 1).
The diffusion index (DI) approach2,3 , likewise showed unchanged overall credit standards for loans to enterprises with equal number of banks indicating tightening and easing credit standards. However, the DI pointed to a net tightening of overall credit standards for loans to households in Q4 relative to the previous quarter, with the DI recorded at 4.8 percent. The details of the DI computation found in Table 1 (see also Chart 2). In the previous quarter, credit standards for corporate lending showed a slight net tightening, while credit standards for loans to households showed a slight net easing using the DI approach.
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. 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 34 banks responding in the latest survey, representing a response rate of 97.1 percent.6 The analysis in the survey is based on comparisons with data for the immediately preceding quarter.
Lending to Enterprises
Most banks (86.7 percent of banks that responded to the question) indicated that credit standards for loans to enterprises were kept steady during the quarter using the modal approach. The unchanged overall credit standards was attributed by banks to their steady outlook on the domestic economy as well as specific industries, including manufacturing and real estate, unchanged tolerance for risk, and unchanged view on profile of borrowers. In particular, banks’ responses indicated unchanged collateral requirements and loan covenants on the whole.7
By borrower firm size, overall credit standards for top corporations were unchanged for the second consecutive quarter based on the DI approach. Meanwhile, overall credit standards for large middle-market enterprises, small and medium enterprises (SMEs), and micro enterprises continued to show a net tightening, based on the DI approach.
For the next quarter, most of the respondent banks still expect credit standards for loans to enterprises to remain unchanged. However, the percentage of banks foreseeing a slight easing of credit standards for loans to businesses (except micro enterprises) was higher compared to those expecting the opposite. A more favorable economic outlook along with expectations of more aggressive competition from banks and non-bank lenders were cited by respondent banks as key reasons behind the expected net easing of credit standards.
Lending to Households
Using the modal approach, the survey results likewise showed that most of the respondent banks (85.7 percent) continued to report unchanged credit standards for loans extended to households. The DI approach, however, indicated a net tightening of credit standards for households on the back of perceived stricter financial system regulations and reduced tolerance for risk of banks. In particular, banks’ responses indicated overall stricter collateral requirements for loans extended to households along with unchanged maturity period for loans on the whole.
Over the next quarter, credit standards for households are expected to hold steady, on the whole, using both the modal and DI approaches. Expectations of unchanged tolerance for risk and steady economic outlook were among the factors cited for said result.
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 demand8 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 inventory financing and working capital needs of borrower firms as well as an improved economic outlook. Meanwhile, the net increase in demand for household loans was due to lower interest rates and more attractive financing terms offered by banks.
The net increase in loan demand for both business and household loans, using the DI approach, was reflected in the robust lending activity of banks during the quarter.
Looking ahead, most of the respondent banks expect unchanged loan demand over the next quarter. However, a larger proportion of respondents expect demand for loans to increase further in the next quarter relative to those who indicated the opposite. For loans to businesses, the net increase in demand for loans was attributed by respondent banks to higher inventory and accounts receivable financing needs, increased working capital needs of borrower firms, and lower interest rates. For loans to households, meanwhile, banks’ more attractive financing terms and lower interest rates were cited by respondent banks as factors behind the expected increase in loan demand.
Special Questions on Commercial Real Estate Loans
Most of the respondent banks (85.0 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 sixth consecutive quarter in Q4 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, respondent banks reported wider loan margins, reduced credit line sizes, stricter collateral requirements and loan covenants, increased use of interest rate floors, and lower loan-to-value ratios for commercial real estate loans.
Demand for commercial real estate loans was also unchanged in Q4 2013 based on the modal approach. A number of banks, however, indicated increased demand for the said type of loan on the back of more attractive financing terms of banks and lower interest rates.
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 generally steady loan demand, a number of banks are of the view that demand for commercial real estate loans will continue to increase in the next quarter.
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 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 September 2013, U/KB loans accounted for about 86.4 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 “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