Results of the Q2 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 29th 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 slight net tightening of overall credit standards for loans extended to business while overall credit standards for loans to households were basically unchanged. In the previous quarter, credit standards for corporate lending also showed a net tightening while those for household loans were unchanged 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 as well as conditions in asset markets, and the strength of 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 35 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 changes in the perception of respondent banks.
Lending to Enterprises
Most banks (87.1 percent of banks that provided answers to the section) indicated that credit standards for loans to enterprises remained unchanged during the quarter using the modal approach. However, results based on the DI approach indicated net tightening as respondent banks indicating tighter overall credit standards outnumbered those that indicated the opposite. The tighter overall credit standards was attributed by respondent banks to perceived stricter financial system regulations, their reduced tolerance for risk, less favorable outlook on certain industries or firms, and deterioration of banks’ portfolio. In terms of specific credit standards, the net tightening of overall credit standards for business loans reflected stricter loan covenants and increased use of interest rate floors.7
In terms of borrower firm size, banks responses showed a net tightening of overall credit standards for loans to large middle-market enterprises and small and medium-sized enterprises (SMEs) while loan standards for top corporations and micro enterprises were unchanged based on the DI approach.
Results based on both the modal and DI approaches showed that respondent banks anticipate unchanged credit standards over the next quarter largely on account of banks’ stable outlook on the economy as well as on certain industries or firms, along with their expectations of an unchanged tolerance for risk.
Lending to Households
The survey results likewise showed that most of the respondent banks (83.3 percent) continued to report unchanged overall credit standards for loans extended to households. Similarly, the DI approach showed broadly unchanged overall credit standards for household loans in Q2 2016 as banks that reported overall easing of credit standards equaled those that reported tighter credit standards during the quarter. The steady credit standards were attributed by respondent banks largely to their unchanged risk tolerance and profile of borrowers, stable economic outlook of respondent banks and unchanged degree of competition from banks and non-bank lenders. In particular, banks’ responses indicated unchanged loan maturities across all types of household loans, except housing loans, and steady use of interest rate floors for auto loans.
For the next quarter, results based on both the modal and DI approaches likewise showed expectations of unchanged overall credit standards, particularly for housing and credit card loans, reflecting banks’ steady economic outlook and unchanged tolerance for risk.
Responses to the survey question on observed 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 and household loans. The net increase in loan demand of firms, in particular, top corporations, large middle-market enterprises, small and medium-sized enterprises and microenterprises, 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 also expect overall demand for corporate loans to increase further in the next quarter relative to those who indicated the opposite. Respondent banks cited expectations of higher working capital and accounts receivable financing needs of borrower firms along with improved economic outlook of clients and low market interest rates 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 as well as more attractive financing terms offered by banks.
Real Estate Loans
Most of the respondent banks (90.5 percent) also indicated unchanged credit standards for commercial real estate loans in Q2 2016. The DI approach, however, continued to indicate a net tightening of overall credit standards for the second consecutive quarter. The tighter overall credit standards for commercial real estate loans reflected respondent banks’ reduced tolerance for risk and perception of stricter financial system regulations. In terms of specific credit standards, respondent banks showed wider loan margins, reduced credit line sizes, stricter loan covenants, and increased use of interest rate floors.
Demand for commercial real estate loans was also unchanged in Q2 2016 based on the modal approach. A number of banks, however, indicated increased demand for the said type of loan on the back of increased working capital and inventory financing needs of borrowers, clients’ improved economic outlook, and more attractive financing terms offered by banks. 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 (85.0 percent) reported unchanged credit standards. Using the DI approach, however, a slight tightening of credit standards for housing loans was noted in Q2 2016. The net tightening of credit standards for housing loans was attributed by respondent banks largely to perceived stricter financial system regulations and reduced risk tolerance for said type of loans. Over the next quarter, results based on both the modal and DI approaches showed expectations of broadly unchanged overall credit standards for housing loans as respondent banks anticipate unchanged tolerance for risk and profile of borrowers. At the same time, results continued to show increased demand for housing loans in Q2 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 41 U/KBs as of January 2016 are included in the survey.
6 As of March 2016, U/KB loans accounted for about 86.5 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.
View Tables | Chart 1 | Chart 2