Lenders expect tighter lending standards in fourth quarter

MOST BANKS remained strict in their loan standards during the third quarter, with many expected to further tighten lending criteria in the fourth quarter as the pandemic drags on, according to a survey by the Bangko Sentral ng Pilipinas (BSP).

“Banks have continued to adopt stringent lending standards in part to avoid further escalation of nonperforming loans that can threaten their financial sustainability. This has contributed to a slowdown in bank lending to businesses and households in the most recent quarters,” said BSP Governor Benjamin E. Diokno in a briefing on Thursday.

The Senior Bank Loan Officers’ Survey — which assesses banks’ lending decisions — saw answers from 48 out of 64 banks surveyed between Sept. 2 and Oct. 13, representing a response rate of 75%.

The central bank’s survey found that while most respondent banks anticipate keeping credit standards for firms, a large percentage also expect to tighten loan criteria due to “a more uncertain economic outlook along with expected deterioration in borrowers’ profiles and profitability of banks’ portfolios, including banks’ lower tolerance for risk.”

Meanwhile, lenders’ outlook for the next quarter based on both the modal and diffusion index (DI) approaches showed they are expecting stricter overall lending standards for household loans due to economic uncertainty, a likelihood of deterioration among borrowers’ profile and lower risk tolerance of banks.

Based on the DI approach, respondent banks expect loans to pick up on the back of higher working capital requirements, an uptick in customer inventory financing, and the lack of internally generated funds and other sources.

On the other hand, lenders anticipate a drop in demand for consumer loans such as housing, auto, and personal loans amid tempered consumption and housing investment.

Mr. Diokno is hopeful that loan demand will pick up in the near term as the economy gradually reopens.

“Continued reopening of the economy should incrementally boost loan demand in the next quarters, as capital requirements of businesses increase in anticipation of the economy’s sequential recovery,” he said.

In the third quarter, results showed respondent banks continued to tighten their credit standards for enterprises and households.

“So based on the modal approach, results show that the majority of respondent banks continued to report tighter overall credit standards in the third quarter although they are fewer compared to the second quarter,” Lara Romina E. Ganapin, acting deputy director of the BSP Department of Economic Research, said during the briefing.

In August, loan growth eased to 4.7%, the slowest since the 2.4% pace in June 2007 when the global financial crisis (GFC) was just starting.

To recall, the April to June period saw the majority of respondent banks reporting tighter credit standards following 44 consecutive quarters of broadly unchanged criteria. This trend was similarly observed during the first quarter of 2009 at the height of the GFC.

In the third quarter, the stricter loan criteria was imposed across firm sizes — including top corporations, large middle-market enterprises, small and medium enterprises, and microenterprises.

“In terms of specific credit standards, the net tightening of overall credit standards was manifested in terms of reduced credit line sizes; stricter collateral requirements and loan covenants; and increased use of interest rate floors,” the BSP said.

On the other hand, respondent banks also reported imposing narrower loan margins and longer loan maturities, which are forms of easing.

For consumer loans, stricter criteria was implemented across loan types such as housing, credit card, auto, and personal/salary loans. — Luz Wendy T. Noble