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Contraction in Commercial Bank Lending Slows to 2.0 Percent in August 2002

10.24.2002

Loans outstanding of commercial banks (KBs) reached P1.376 trillion as of end-August 2002, 2.0 percent lower compared to the P1.404 trillion recorded during the same period in the previous year. This, however, reflects an improvement from the 2.9 percent year-on-year contraction in the previous month. The restrained lending by commercial banks reflected their bid to improve further the quality of their assets. This was reflected in the decline in KBs’ non-performing loan ratio in August 2002 to 17.6 percent after hovering at the 18.0 percent mark since the beginning of the year.

By sector, borrowing activities in the community, social and personal services and the financial institutions, real estate and business services (FIREBS) in August—which rose by 14.2 percent and 5.6 percent, respectively—boosted mainly KB lending. The significant growth in bank lending to these sectors during the last two months—which accounted for a combined share of 42 percent of total KB loans—was, however, offset by the continued decline in the borrowing activities in all the other sectors.

Moving forward, the improving domestic demand conditions amidst a low interest rate environment could propel increased demand for bank lending for productive activities in the months ahead. The improvement is indicated by the continued year-on-year increase in the volume of production index (VOPI) and the value of production index (VAPI) during the period April-July 2002, and the increased automotive industry sales which rose by 8.1 percent relative to the same period last year. Moreover the increasing volume of KBs’ credit card receivables—rising by 7.3 percent at P48.7 billion during the second quarter from P45.4 billion in the previous quarter— is also indicative of the underlying strength in personal consumption.

In the light of these developments, the monetary authorities will continue to adhere to an appropriate monetary policy stance in order to provide the credit requirements of a growing economy while keeping in check the pressures to price stability.

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