Results of the Q1 2016 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.1,2 This is the 28th consecutive quarter since Q2 2009 that the majority of banks reported broadly unchanged credit standards (see Chart 1).
Meanwhile, the diffusion index (DI) approach3 pointed to a net tightening of overall credit standards for loans extended to businesses while overall credit standards for loans extended to households were unchanged. In the previous quarter, credit standards for both corporate lending and household loans eased slightly based on the DI approach.
The BSP has been conducting the SLOS since 2009 to gain a better 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 asset markets, and possible strains in bank lending 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 32 banks responding in the latest survey, representing a response rate of 91.4 percent.6 The analysis in the survey is based on the quarter-on-quarter changes in the perception of respondent banks.
Lending to Enterprises
Most banks (86.7 percent of banks that responded to the question) indicated that credit standards for loans to enterprises remained unchanged during the quarter using the modal approach. Meanwhile, a net tightening was observed using the DI approach as the number of respondents indicating tighter overall credit standards outnumbered those that indicated the opposite. The net tightening of overall credit standards was attributed by respondent banks to their reduced tolerance for risk, perception of stricter financial system regulations, and more uncertain outlook on certain industries and firms. In terms of specific credit standards, the net tightening of overall credit standards for business loans reflected stricter collateral requirements and loan covenants.7
In terms of borrower firm size, overall credit standards tightened across all firm sizes, except for small and medium enterprises (SMEs) for which overall credit standards were unchanged based on the DI approach.
Most of the respondent banks foresee maintaining their overall credit standards for loans to businesses over the next quarter. However, the percentage of banks expecting a slight easing of overall credit standards for enterprises was higher compared to those expecting the opposite. Respondent banks cited expectations of improvement in the profitability of banks’ portfolio and more aggressive competition from banks and non-bank lenders as among the reasons for 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. At the same time, the DI approach showed basically unchanged overall credit standards for household loans in Q1 2016 with equal percentages of banks reporting tighter and easier credit standards for the quarter. Respondent banks attributed the steady credit standards to banks’ unchanged tolerance for risk and profile of borrowers, among others. In particular, banks’ responses indicated overall unchanged loan margins and maturities. Respondent banks likewise maintained collateral requirements and loan covenants, particularly for auto loans and personal/salary loans during the quarter.
Looking ahead, most of the respondent banks expect their overall credit standards for household loans to remain unchanged. However, some banks anticipate overall credit standards to ease slightly on expectations of higher risk tolerance, improvement in borrowers’ profiles, and more aggressive competition from banks and non-bank lenders, along with banks’ more favorable overall outlook on the economy.
Responses to the survey question on loan demand indicated that the majority of the respondent banks continued to see stable overall demand for loans from both enterprises and households. Using the DI approach, however, results showed a net increase in loan demand8 across all firm sizes, except for micro enterprises, and all household loans, except for credit cards and auto loans. The net increase in loan demand of firms9 was largely attributed by banks to higher requirements of borrower firms for working capital and accounts receivable financing. Meanwhile, the net increase in demand for household loans reflected higher household consumption and banks’ more attractive financing terms, among others.
Over the next quarter, most of the respondent banks expect unchanged loan demand from both firms and households. However, a larger proportion of respondents expect overall demand for corporate loans to increase further in the next quarter relative to those who indicated the opposite. Respondent banks cited the improved economic outlook of clients along with expectations of higher working capital and accounts receivable financing needs of borrower firms as the key factors behind the expected increase in demand for business loans. Meanwhile, the anticipated net increase in household loan demand was attributed by respondent banks largely to higher household consumption and investment as well as more attractive financing terms offered by banks.
Real Estate Loans
Most of the respondent banks (95.2) also indicated unchanged credit standards for commercial real estate loans in Q1 2016. The DI approach, however, indicated a net tightening of overall credit standards for the said type of loan after being unchanged in the previous quarter. The tighter overall credit standards for commercial real estate loans reflected respondent banks’ reduced tolerance for risk, deterioration in the profile of borrowers, and perception of stricter financial system regulations. In terms of specific credit standards for commercial real estate loans, banks’ responses showed wider loan margins, reduced credit line sizes, stricter collateral requirements, and increased use of interest rate floors.
Demand for commercial real estate loans was also unchanged in Q1 2016 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 increased working capital and inventory financing needs of customers, among others. 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 increase further.
Similarly, in the case of housing loans extended to households, most of the respondent banks (82.4 percent) reported unchanged credit standards. Using the DI approach, however, a slight easing of credit standards for housing loans was noted in Q1 2016. The net easing of credit standards for housing loans was attributed by respondent banks largely to improvement in borrower’s profile and higher risk tolerance of banks for the said type of loan. Over the next quarter, although most respondent banks foresee maintaining their credit standards for housing loans, a number of banks expect credit standards to tighten slightly on expectations of lower tolerance for risk. At the same time, results continued to show increased demand for housing loans in Q1 2016 as well as expectations of a continued increase in demand for the said type of loan in the next quarter.
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 positive 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, such as the US Federal Reserve, the European Central Bank, the Bank of England, the Bank of Canada, and the Bank of Japan.
5 Thirty-five out of the total thirty-six U/KBs as of January 2016 are included in the survey.
6 As of December 2015, U/KB loans accounted for about 87.6 percent of the banking system’s total loan portfolio.
7 The survey questionnaire asks banks to describe changes in 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 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.
9 In particular, top corporations, large middle-market enterprises, and SMEs.
View Tables | Chart 1 | Chart 2