Banks tighten credit standards to ward off rise in loan defaults

Banks tightened their credit standards in the third quarter, in a bid to prevent a potential rise in loan defaults following easy access to loans and uncertainties in the economic climate.

According to the results of a survey by the Bangko Sentral ng Pilipinas (BSP), banks imposed stricter parameters in lending to businesses in the third quarter relative to the second quarter as a response to the bleak economic outlook.

“The overall net tightening of credit standards for loans to enterprises reflected the banks’ less optimistic outlook on the general economy and certain industries amid uncertainties brought about by adverse external developments during the quarter,” the BSP said in a report on its latest survey on credit standards.

Results showed that the diffusion index for credit standards increased to +7.1 percent in the third quarter relative to the second quarter, indicating tightening.

The diffusion index measures the difference between the percentage of respondents that imposed stricter lending parameters and the percentage of respondents that eased loan requirements.

Earlier, the central bank reported that the diffusion index for the second quarter relative to the first quarter was also positive at +5.6 percent, indicating that banks have been tightening credit standards since the start of the year.

Credit standards refer to lending parameters and requirements that banks impose on borrowers.

These include interest rates, size of credit lines, collateral requirements, maturities, and terms of loan covenants.

The tightening of credit standards for enterprises so far this year is attributed to the prolonged crisis in the eurozone and the anemic performance of the US economy. Economic problems in the advanced economies are blamed for the contraction in earnings of Philippine exporters, which are some of the regular clients of banks.

On the contrary, credit standards for households, which account for a smaller portion of loan portfolio of banks, eased in the third quarter relative to the second quarter.

The diffusion index for household credit standards stood at -8.3 percent.

Industry players said appetite for lending to households is strong amid a generally positive outlook on income of households. The favorable outlook is supported by the sustained rise in remittances.

Meantime, the BSP said the tightening of credit standards imposed by banks on their dealings with corporate clients did not necessarily mean the banks were lending less to them.

The BSP said banks continued to register a rise in lending to businesses, but that they were more prudent and stricter in their extension of loans, wanting to make sure the credit they extend will not eventually be included in their list of non-performing loans.

In fact, the central bank said, bank lending this year has been growing at an unusually faster rate because of the growing liquidity and profitability of the banking sector.

The latest report on lending said that as of end-August this year, the growth in bank loans accelerated to its fastest pace in over two years.

Total loan portfolio of universal and commercial banks amounted to P2.62 trillion as of end-August compared with the P2.18 trillion as of the same period last year.