Banks seen tightening loan standards

Philippine banks expect to impose tighter lending standards in the fourth quarter of the year to corporate borrowers due to expectations that the country’s economic challenges will erode their credit-worthiness, according to a newly released central bank survey.

The survey, conducted in the previous quarter among senior loan officers, also showed that banks expected to impose more stringent credit rules on individual or household borrowers in the fourth quarter as tighter monetary policy drains excess cash from the financial system.

“Results based on the diffusion index approach showed that more respondent banks expect overall credit standards for business loans to tighten over the [fourth] 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,” the Bangko Sentral ng Pilipinas said regarding lending to enterprises.

This tightening was also evident in the just-concluded third quarter of 2018, which also saw banks impose stricter standards on lending to companies largely due to their perception of stricter financial system regulations.

The survey revealed that banks during the previous quarter imposed 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,” the central bank said.

Meanwhile, the central bank said that diffusion index-based results pointed to expectations of overall net tightening of credit standards for household loans in the fourth quarter of 2018 as respondent banks anticipate a deterioration in the liquidity of their portfolio and a decreased deposit base.

The third quarter also saw banks become more conservative when granting auto loans and personal or 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,” the BSP said. “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.”

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 regulators assess the robustness of credit demand conditions.