Results of the Q1 2015 Senior Bank Loan Officers’ Survey (SLOS), based on the modal approach,1,2 showed that most of the respondent banks maintained their credit standards for loans to both enterprises and households during the quarter. This is the 24th consecutive quarter since Q2 2009 that the majority of banks reported broadly unchanged credit standards (see Chart 1).
The diffusion index (DI) approach,3 on the other hand, pointed to a net tightening of overall credit standards for loans to both enterprises and households in Q1 2015 with the corresponding DIs recorded at 13.8 percent and 5.3 percent, respectively. In the previous quarter, DI-based results showed that 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 33 banks responding in the latest survey, representing a response rate of 94.3 percent.6 The analysis in the survey is based on the quarter-on-quarter change in the perceptions of respondent banks.
Lending to Enterprises
Most banks (79.3 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. However, based on the DI approach, credit standards for loans to enterprises showed a net tightening in line with expectations in the previous quarter. The tightening was observed across all firm sizes. The tighter overall credit standards were attributed by respondent banks to their reduced tolerance for risk as well as perceptions of stricter financial system regulations. In terms of specific credit standards, banks’ responses indicated stricter collateral requirements and loan covenants for all types of business loans, except micro enterprises, as well as shorter loan maturities for loans to small and medium enterprises (SMEs).7
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 overall credit standards for loans to businesses was higher compared to those expecting the opposite. Respondent banks cited more aggressive competition from banks and non-bank lenders, increased tolerance for risk, and improvement in the profitability of banks’ portfolio as among the 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 (84.2 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 all types of household loans. In particular, banks’ responses indicated stricter collateral requirements for all types of loans extended to households and wider loan margins for housing and auto loans. Tighter credit standards for household loans have been noted for the sixth consecutive quarter, owing largely to perceived stricter financial system regulations.
Most of the respondent banks expect to maintain their overall credit standards over the next quarter. However, some banks still foresee overall credit standards tightening slightly for credit card, auto, and personal/salary loans due largely to expectations of continued strict financial system regulations and banks’ reduced tolerance for risk.
Responses to the survey question on loan demand indicated that the majority of the respondent banks continued to see unchanged overall demandfor loans from both enterprises and households (see Chart 2). Using the DI approach, however, a net increase in overall demand 8 for loans from both enterprises and households was continued to be observed. The net increase in loan demand of firms was attributed by banks to clients’ improved outlook on the economy as well as increased inventory and accounts receivable 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. 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. The expected net increase in loan demand by firms was attributed by respondent banks to the higher inventory and working capital financing needs of borrower firms along with the improved economic outlook of clients. At the same time, banks’ responses pointed to an increase in demand for household loans over the next quarter based on both the modal and DI approaches. Expectations of higher household consumption, banks’ more attractive financing terms, and lower interest rates were cited by respondent banks as key factors behind the anticipated increase in demand for household loans.
Real Estate Loans
Most of the respondent banks (78.9 percent) in Q1 2015 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 11th consecutive quarter. 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 along with stricter collateral requirements and loan covenants for commercial real estate loans. At the same time, respondent banks also cited reduced credit line sizes and shorter maturities for this type of loan.
Demand for commercial real estate loans was also unchanged in Q1 2015 based on the modal approach. A number of banks, however, indicated increased demand for the said type of loan on the back of clients’ improved economic outlook as well as increased inventory 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, a number of banks expect demand for commercial real estate loans to continue increasing in the following quarter, although most of the respondent banks anticipate generally steady loan demand.
Similarly, credit standards for housing loans extended to households showed a net tightening in Q1 2015 based on the DI approach. The tighter credit standards for housing loans were attributed by respondent banks to perceived stricter financial system regulations. Banks’ responses showed wider loan margins and stricter collateral requirements for housing loans. At the same time, results continued to show increased demand for housing loans in Q1 2015 using the DI approach.
For the next quarter, the majority of the respondent banks foresee their credit standards for housing loans remaining unchanged, alongside a continued increase in demand for housing loans.
1 From Q1 2010 to Q4 2012 survey rounds, the BSP used largely the diffusion index (DI) approach in the analysis of survey results. Beginning in Q1 2013, the BSP used both the modal and diffusion index (DI) approaches in assessing the results of the survey.
2 In the modal approach, the results of the survey are analyzed by looking at the option with the highest share of responses.
3 In the DI approach, a 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”).
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 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 2014, U/KB loans accounted for about 86.6 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 agreement or stipulation forms 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 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