S&P warns against excess growth in bank lending


Standard & Poor’s has aired its concern over the robust pace of growth in bank lending in Asia-Pacific, saying excessive credit may eventually spawn economic problems.

Also, faster inflation is believed to be another emerging risk as the banking sectors in the region continue to lend aggressively.

“In contrast to Europe and the US, private-sector credits in Asia Pacific have grown over the past several years. The fast pace of loan growth, particularly in emerging markets, could encourage excess investment and lead to economic imbalances,” S&P said in its latest report, “Asia Pacific Banking Outlook 2013: Shakier Asset Quality a Key Risk.”

Although banks in Asia-Pacific are generally much healthier than their counterparts in the United States and the euro zone, S&P said failure to monitor lending activities now could lead to problems in the future.

In the case of the Philippines, lending growth has been sustained at a double-digit pace on the back of banks’ enormous liquidity. The robust pace of credit expansion also is attributed to historically low interest rates, which have encouraged consumers and enterprises to secure loans.

The Bangko Sentral ng Pilipinas earlier said that outstanding loans from banks in the country grew year on year by 15.4 percent to P3.18 trillion in January. This has pushed the annual growth rate in the domestic economy’s liquidity, measured in terms of M3, to 10.8 percent in January from 7.2 percent in the same month last year.

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  • carlcid

    Property bubbles, along with reckless bank lending, are sure-fire recipes for financial disaster. People are getting punch-drunk right now and the euphoria is contagious. Until the party comes to an end and the painful consequences of irrational exuberance begin to set in.

    • Peace man!

      Your point will be more believable only if you can support it! 
      I believe economist and government are already aware of the danger of property bubble which had led to meltdown in Asia and in the US and with that said, I think they are constantly monitoring this. With an interconnected/globalized economy, the worlds economist will constantly check each and every nation activity for a single collapse in a counter can certainly have great implication to the rest of the world!

      I feel your fear too, Sir! However, I feel that government, banking and other multilateral agencies are also looking into it to prevent that from happening!

  • Hayek_sa_Maynila

    15.4% loan growth is a very healthy pace for the PHL. In fact, this should really expand faster given than the nominal growth (real + inflation) of the PHL economy is about 10% to 12%

    The PHL suffered many years of anemic lending due to 1) the Asian Crisis and 2) political instability during most of the previous administration’s term. Banks were largely just parking their funds in Government securities from 1999 to 2005 which then provided very fat yields, a sharp contrast to the low rates they offer these days. We are therefore, just making up for lost opportunities in the past.

    Money supply growth should, in fact, grow hand in hand with credit growth as it is more reassuring that banks are not getting over leveraged if the gap of their growth rates widen.

    Diverging growth rates in M3 and credit growth signal either 1) banks boosting their loan/deposit ratio or 2) sourcing loanable funds aggressively through foreign-currency denominated liabilities whether on-book or off-book.

    The latter, is of course, the bigger risk as it exposes the economy to a curreny mismatch in the balance sheets of PHL corporations, similar to the 1990s. This led to the Asian crisis wherein many local companies ended up defaulting on their loans. We should therefore feel more reassured when M3 growth grows at a similar pace as bank loans as it signals that bank loans are funded largely by peso funds and free of the dangers of currency risk.

    Truth is, M3 has expanded by double digits only during the last 2 months, a phenomenon not seen since 2006-2007. Ideally, Its growth rate should catch up with loan growth and fortunately is now being made possible by the BSP’s lowering of the yield on SDAs.

    We should support the BSP’s plan to cut the SDA rate further to allow 1)M3 growth to catch up with credit growth, 2) develop the domestic capital markets, 3) help the monetary authorities cut unnecessary sterilization costs and 4) keep the economy stable by discouraging excessive carry-trade opportunities for financial institutions here and abroad.

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