The volume of outstanding loans of commercial banks stood at P1.38 trillion as of end-January 2002, 3.2 percent lower than the level reached a year ago as lending to most sectors showed declines. This compares favorably with the 3.6 percent year-on-year drop as of end-December 2001. It will be recalled that lending activity has been on a declining trend since August 2001.
Lending activities of banks have been restrained as they have become more circumspect due, in part, to the increasing levels of non–performing loans (NPLs) combined with weak corporate demand due to the presence of spare capacity in the manufacturing sector and still weak global economic conditions. The ratio of NPLs to total loans of commercial banks rose to 18.30 percent as of end-January 2002 from the 17.35 percent registered at the end of 2001. Meanwhile, the average capacity utilization of firms was at 76.9 percent in December 2001, almost unchanged from 76.6 percent recorded in November 2001.
The decline in bank lending to most sectors in January 2002 was tempered partially by increased lending to the mining and quarrying sector as well as to the community and social & personal services sector.
Moving forward, the successive monetary easing measures of the BSP—consisting of the cumulative 800 basis points reduction in the BSP’s key policy rates since December 2000 and the restoration of the banks’ reserve requirements to pre-July 2001 levels—are expected to help contribute to a further decline in bank lending rates as well as provide sufficient liquidity in the system. Based on the latest data as of 13 March 2002, bank lending rates have declined by about 885 basis points since December 2000. Overtime, the monetary easing measures are expected to take a firmer hold in the economy—by lifting pressures off the banks’ NPLs and corporate re-financing efforts and encouraging vigorous lending to productive activities. This, in turn, would help propel domestic demand and boost economic activity.