PH banks expect to tighten credit in response to higher loan demand

Banks expect the demand for credit to rise in the current quarter especially among corporate, consumer and real estate borrowers but, at the same time, intend to tighten lending standards in anticipation of rising risk.

Thus said the Bangko Sentral ng Pilipinas (BSP) in a statement detailing the findings of its latest Senior Bank Loan Officers’ Survey, which—as in previous quarters—showed broadly unchanged lending standards using the modal approach survey method, while a second diffusion index method showed more bearish sentiments among bankers.

“Results based on the diffusion index approach showed that more respondent banks expect overall credit standards for business loans to tighten over the next quarter compared to those that expect the opposite,” the BSP said referring to loans to enterprises in the third quarter.

This tightening of credit standards was on the back of respondent banks’ expectations of stricter financial system regulations, reduced tolerance for risk, deterioration in borrower’s profile and less favorable economic outlook, among other factors, the regulator said.

Meanwhile, diffusion index-based results indicated expectations of overall net tightening of credit standards for household loans. This is because the respondent banks anticipate lower tolerance for risk and stricter financial system regulations along with deterioration in borrower’s profile and profitability of banks’ portfolios.

The central bank survey noted that, in the third quarter, most respondent banks also pointed to expectations of continued net tightening of credit standards for real estate loans.

Banks attributed the expected tightening of credit standards for housing loans to lower risk tolerance, stricter financial system regulations and a deterioration in the profile of borrowers.

In terms of loan demand, the diffusion index approach suggested expectations of a net increase in overall loan demand for both business and household loans, the survey showed.

“For business loans, the expected net increase in demand was associated by respondent banks to their corporate clients’ higher working capital requirements, among other factors,” according to the report.

“Meanwhile, the anticipated net increase in loan demand from households was attributed by respondent banks largely to expectations of higher household consumption and housing investment,” it added.

The BSP has been conducting this survey 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. In the latest survey, survey questions were sent to a total of 66 banks—42 universal and commercial banks and 24 thrift banks—45 of whom sent in their responses, representing a response rate of 68.2 percent.