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Bank Lending Standards Remain Broadly Unchanged in Q2 2015

07.22.2015

Results of the Q2 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 25th consecutive quarter since     Q2 2009 that the majority of banks reported broadly unchanged credit standards (see Chart 1).

Similarly, the diffusion index (DI) approach3  pointed to basically unchanged overall credit standards for both enterprises and households in Q2 2015 as the number of respondent banks reporting tighter credit standards equaled the number of respondent banks reporting easier credit standards. In the previous quarter, DI-based results showed that credit standards for both corporate lending and 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.  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 the quarter-on-quarter change in the perceptions of respondent banks.

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. Respondent banks attributed their unchanged credit standards to their steady outlook on the domestic economy as well as specific industries, such as wholesale and retail trade, manufacturing, and utilities, among others, as well as banks’ unchanged tolerance for risk. In terms of specific credit standards, the unchanged overall credit standards for enterprises were reflected in unchanged collateral requirements and steady use of interest rate floors. Meanwhile, a number of banks also reported narrower loan margins and increased credit line sizes for all types of business loans, except those to micro enterprises, as well as longer loan maturities for top corporations and large middle-market enterprises.7

By borrower firm size, overall credit standards for top corporations and large middle-market enterprises showed slight net easing based on the DI approach. Meanwhile, credit standards for small and medium enterprises (SMEs) and micro enterprises showed a slight 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 expecting a slight easing of overall credit standards for loans to businesses was higher compared to those expecting the opposite, particularly for top corporations, large middle-market enterprises, and SMEs. Respondent banks cited expectations of an increase in the deposit base, higher tolerance for risk, and improvement in the liquidity of banks’ portfolio as among the reasons behind the expected net easing of credit standards.

Lending to Households

The survey results likewise showed that most of the respondent banks (81.0 percent) continued to report unchanged overall credit standards for loans extended to households. The respondent banks’ unchanged tolerance for risk as well the unchanged profile of borrowers contributed to the unchanged credit standards for household loans in Q2 2015. In particular, banks’ responses indicated unchanged loan margins, loan covenants, and loan maturities along with steady use of interest rate floors for loans to households.

Most of the respondent banks foresee maintaining their overall credit standards over the next quarter. However, some banks expect overall credit standards to ease slightly due largely to expectations of banks’ increased tolerance for risk.

Loan Demand

Responses to the survey question on loan demand indicated that the majority of the respondent banks continued 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 firms was attributed by banks to increased inventory and working capital needs of borrower firms and clients’ improved economic outlook, among others. Meanwhile, the net increase in overall demand for household loans reflected higher household consumption and housing investment.

Looking ahead, most of the respondent banks expect unchanged loan demand for loans to both firms and households. 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, banks’ more attractive financing terms and lower interest rates. Meanwhile, expectations of higher household consumption, higher housing investment, lower interest rates, and banks’ more attractive financing terms 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 (86.4 percent) in Q2 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 12th 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. In particular, respondent banks reported stricter collateral requirements and loan covenants along with wider loan margins, shorter loan maturities, and increased use of interest rate floors for commercial real estate loans. 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.

Demand for commercial real estate loans was also unchanged in Q2 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 and banks’ more attractive financing terms. Over the next quarter, 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.

Similarly, credit standards for housing loans extended to households showed net tightening in Q2 2015 based on the DI approach. The tighter credit standards for housing loans were attributed by respondent banks to perceived stricter financial system regulations along with banks’ reduced tolerance for risk and deterioration in the profile of borrowers. For the next quarter, respondent banks expect unchanged credit standards for housing loans.

At the same time, results continued to show increased demand for housing loans in Q2 2015 as well as expectations of a continued increase in demand for the said type of loan in the next quarter.

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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.
In the modal approach, the results of the survey are analyzed by looking at the option with the highest share of responses.
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.
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 March 2015, 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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