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Bank Lending Standards Remain Unchanged in Q4 2014

01.23.2015

Results of the Q4 2014 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 23rd consecutive quarter starting  Q2 2009 that majority of banks reported broadly unchanged credit standards (see Chart 1).

The diffusion index (DI) approach,2,3  likewise showed unchanged overall credit standards for loans to enterprises as the number of banks indicating tighter credit standards equaled the number of banks that indicated easing credit standards. However, the DI approach pointed to a net tightening of overall credit standards for loans to households in Q4 2014 relative to the previous quarter, with a DI of 14.3 percent. In the previous quarter, credit standards for corporate lending were unchanged, while credit standards for loans to households showed a net tightening.

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 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 (93.5 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, such as wholesale and retail trade, manufacturing, and real estate, renting and business activities, among others. Meanwhile, in terms of specific credit standards, banks’ responses were mixed. On the one hand, results showed overall net narrowing of loan margins, net increase in credit line sizes, and less use of interest rate floors. On the other hand, banks’ responses indicated stricter collateral requirements and loan covenants as well as shorter loan maturities for enterprises.7 

By borrower firm size, overall credit standards for top corporations and small and medium enterprise (SMEs) were unchanged based on the DI approach. Meanwhile, credit standards for large middle-market and micro enterprises showed a net tightening.

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 tightening of credit standards for loans to businesses was higher compared to those expecting the opposite. Respondent banks cited perceived stricter financial system regulations, less favorable outlook on the domestic economy, and reduced tolerance for risk as among the reasons behind the expected net tightening 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 overall credit standards for household loans owing largely to perceived stricter financial system regulations. In particular, banks’ responses indicated reduced credit line sizes for auto loans and wider loan margins for personal/salary loans.

Most of the respondent banks foresee maintaining their credit standards over the next quarter. However, some banks expect overall credit standards to tighten slightly due to expectations of continued strict financial system regulations and banks’ reduced tolerance for risk, among others.

Loan Demand

Responses to the survey question on loan demand indicated that the majority of the respondent banks continue to see unchanged overall demand for loans from both enterprises and households (see Chart 2). Using the DI approach, however, a net increase in overall demand8  for loans from both enterprises and households was continued to be observed. The net increase in loan demand of businesses was attributed by banks to clients’ improved outlook on the economy as well as increased inventory financing needs of borrower firms, among others. Meanwhile, the net increase in overall demand for household loans reflected higher housing investment, lower interest rates, and more attractive financing terms offered by banks.

Looking ahead, most of the respondent banks expect unchanged loan demand for loans to firms and households over the next quarter. However, a larger proportion of respondents expect overall demand for loans to increase further in the next quarter relative to those who indicated the opposite. For loans to enterprises, the expected net increase in loan demand was attributed by respondent banks to the higher inventory, working capital financing, and fixed-capital investment needs of borrower firms along with the improved economic outlook of clients and banks’ more attractive financing terms. For loans to households, meanwhile, banks’ more attractive financing terms, expectations of higher household consumption, and lower interest rates were cited by respondent banks as key factors behind the anticipated increase in loan demand.

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                         10th consecutive quarter in Q4 2014. The net tightening of overall credit standards for commercial real estate loans was attributed by respondent banks to perceived stricter oversight of banks’ real estate exposure along with banks’ reduced tolerance for risk, among others. In particular, respondent banks reported wider loan margins, reduced credit line sizes, stricter collateral requirements and loan covenants, shorter loan maturities, and increased use of interest rate floors for commercial real estate loans.

Demand for commercial real estate loans was also unchanged in Q4 2014 based on the modal approach. A number of banks, however, indicated increased demand for the said type of loan on the back of increased inventory and working capital financing and fixed-capital investment needs of clients.

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 expect demand for commercial real estate loans to continue increasing in the following quarter.

Meanwhile, credit standards for housing loans extended to households were unchanged in Q4 2014 as the number of banks indicating tighter credit standards equaled those that indicated easing credit standards. The unchanged credit standards for housing loans was attributed to the banks’ unchanged tolerance for risk. Banks’ responses also showed unchanged standards in terms of loan margins, collateral requirements, loan covenants, and loan maturities along with steady use of interest rate floors. At the same time, results continued to show increased demand for housing loans in Q4 2014 using the DI approach.

For the next quarter, majority of the respondent banks expect their credit standards for housing loans to remain unchanged. However, more banks expect to tighten their credit standards compared to those expecting the opposite. Meanwhile, respondent banks foresee a continued increase in demand for housing loans over 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 in Q1 2013, the BSP used both the modal and DI approaches in assessing the results of the survey.
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 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 2014, U/KB loans accounted for about 86.2 percent of the banking system’s total outstanding loans.
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.
The “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 Tables  |  Chart 1  |  Chart 2

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