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Bank Lending Standards Generally Steady in Q3 2018

10.19.2018

Results of the Q3 2018 Senior Bank Loan Officers’ Survey (SLOS) showed that most of the respondent banks continued to maintain their credit standards for loans to both enterprises and households during the quarter based on the modal approach.1  This is the 38th consecutive quarter since Q2 2009 that the majority of respondent banks reported broadly unchanged credit standards (Chart 1).
 
Meanwhile, the diffusion index (DI) approach2,3  showed a net tightening of credit standards for both loans to enterprises and households. In the previous quarter, credit standards for loans to enterprises and households also showed a net tightening 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 credit demand conditions as well as conditions in asset markets, and the overall strength of bank lending as a transmission channel of monetary policy.4  The survey consists of questions on loan officers’ perceptions relating to the overall credit standards of their respective banks, as well as to factors affecting the supply of and demand for loans to both enterprises and households. The analysis of the results of the SLOS focuses on the quarter-on-quarter changes in the perception of respondent banks. Starting in the Q3 2018 survey round, the BSP expanded the coverage of the survey to include new foreign commercial banks and top thrift banks. In the previous survey rounds, the survey covered only universal and commercial banks. Survey questions were sent to a total of 66 banks (42 commercial banks and 24 thrift banks) for the Q3 2018 survey round, 46 of whom sent their responses representing a response rate of 69.7 percent.

Lending to Enterprises

Most banks (76.7 percent of banks that responded to the question) indicated that credit standards for loans to enterprises were maintained during the quarter using the modal approach. Meanwhile, results based on the DI approach pointed to a net tightening of credit standards for the quarter, which was largely attributed by respondent banks to their perception of stricter financial system regulations. DI-based results in terms of specific credit standards5  also showed stricter collateral requirements and loan covenants, and increased use of interest rate floors.

In terms of borrower firm size, banks’ responses indicated a net tightening of credit standards for loans across all firm sizes namely, top corporations, large middle-market enterprises, small and medium enterprises (SMEs) and micro-enterprises based on the DI approach.

For the next quarter, results based on the modal approach showed that most of the respondent banks anticipate unchanged credit standards. Meanwhile, results based on the DI approach showed that more respondent banks expect overall credit standards for business loans to tighten over the next quarter compared to those that expect the opposite, on account of banks’ less favorable economic outlook and expectations of a deterioration of the profile of their corporate borrowers.

Lending to Households

The results of the survey also showed that most respondent banks (75.0 percent) kept their overall credit standards unchanged for loans extended to households during the quarter based on the modal approach. Meanwhile, results based on the DI approach reflected a net tightening of credit standards for household loans, particularly for auto loans and personal/salary loans.

The overall net tightening of standards for household loans reflected reduced credit line sizes, stricter collateral requirements and loan covenants, shorter loan maturities, and increased use of interest rate floors. Respondent banks attribute the tightening of overall credit standards for household loans to their reduced tolerance for risk, deterioration in the liquidity of banks’ portfolio as well as in borrowers’ profiles, and less favorable economic outlook.

In terms of respondent banks’ outlook for the next quarter, results based on the modal approach indicated that the majority of the respondent banks anticipate maintaining their overall credit standards. Meanwhile, DI-based results pointed to expectations of overall net tightening of credit standards for household loans as respondent banks anticipate a deterioration in the liquidity of their portfolio and decreased deposit base of banks, as well as weakening of borrowers’ profiles in the next quarter.

Loan Demand

Responses to the 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 (Chart 2). Using the DI approach, however, results showed a net increase in loan demand6  across all firm sizes and all types of household loans. The net increase in loan demand for firms was attributed by banks to their customers’ higher working capital requirements as well as increased investment in plant or equipment, and improvement in corporate customers’ economic outlook during the quarter. Meanwhile, respondent banks attributed the net increase in loan demand from households to increased household consumption and more attractive financing terms offered by banks, among others.

Over the next quarter, most of respondent banks expect unchanged overall loan demand from firms. However, results based on the diffusion index approach show a net increase in overall loan demand for business loans as respondent banks anticipate that their corporate clients would need higher working capital and increase their investment in plant or equipment in the next quarter. Most of the respondent banks likewise expect unchanged loan demand from households in Q4 2018. However, a larger proportion of respondents expect overall demand for household loans to increase in the next quarter relative to those who indicated the opposite. The anticipated net increase in household loan demand was attributed by respondent banks to higher household consumption and investment and banks’ more attractive financing terms.

Real Estate Loans

Most of the respondent banks (84.6 percent) indicated unchanged credit standards for commercial real estate loans in Q3 2018. The DI approach, however, continued to indicate a net tightening of overall credit standards for commercial real estate loans for the eleventh consecutive quarter. The tighter overall credit standards for commercial real estate loans reflected respondent banks’ wider loan margins, reduced credit line sizes, stricter collateral requirements and loan covenants, shortened loan maturities, and increased use of interest rate floors. Over the next quarter, while majority of the respondent banks foresee maintaining their credit standards for commercial real estate loans, DI-based results point to expectations of continued net tightening of credit standards for the said type of loan.

Demand for commercial real estate loans was also unchanged in Q3 2018 based on the modal approach. Meanwhile, results based on the DI-approach indicated a net decrease in demand for the said type of loan on the back of lower working capital needs of corporate customers as well as an increase in corporate customers’ internally-generated funds. 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.

Meanwhile, credit standards for housing loans extended to households were unchanged based on both modal and DI approaches reflecting unchanged profitability in asset portfolios of respondent banks as well as banks’ unchanged tolerance for risk and steady profile of borrowers for the said type of loan. Over the next quarter, results based on the modal approach showed that respondent banks foresee unchanged credit standards for housing loans. However, DI-based results point to expectations of net easing of credit standards for housing loans in Q4 2018 as respondent banks anticipate an improvement in the profitability and liquidity of their portfolios, increased tolerance for risk, and expectations of more aggressive competition from other lenders. Most banks reported unchanged housing loan demand in Q3 2018 based on the modal approach while DI-based results pointed to a net increase in demand for housing loans during the quarter. Banks’ responses likewise indicated expectations of sustained net 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 DI approach, a positive DI for credit standards indicates that the proportion of banks that have tightened their credit standards exceeds 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 During the Q1 2010 to Q4 2012 survey rounds, the BSP used 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.
The SLOS is similar to the surveys of bank lending standards conducted by 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.
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) use of 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 Table 1 | Table 2 | Chart 1Chart 2 |

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