Pandemic forces banks to tighten credit

No thanks to the ongoing coronavirus pandemic, Philippine banks tightened their loan standards unequivocally for the first time in the 11 years that the Bangko Sentral ng Pilipinas has been surveying senior loan officers to gauge their appetite for lending.

According to the central bank, the results of its second quarter Senior Bank Loan Officers’ Survey showed that most respondent banks clamped down on credit to both enterprises and households.

“This is the first time that the majority of respondent banks reported tighter credit standards following 44 consecutive quarters of broadly unchanged credit standards,” the BSP said in a statement on Monday, adding that a second survey method also showed a net tightening of overall credit standards for both loans to enterprises and households during the same period.

“Results based on both the modal and diffusion index approaches pointed to a tightening of credit standards for business loans, as most banks (69.4 percent of banks that responded to the question) reported tighter overall credit standards for loans to enterprises during the quarter,” the central bank said.

The overall tightening of credit standards was also noted across all borrower-firm sizes, namely, top corporations, large middle market enterprises, small and medium enterprises and microenterprises, as indicated by both survey methods.

“Respondent banks attributed the tightening of credit standards largely to less favorable economic outlook, deterioration in the profiles of borrowers, and banks’ reduced tolerance for risk, among other factors,” the central bank said.

Looking at specific credit standards, the net tightening was reflected in the reduced credit line sizes; stricter collateral requirements and loan covenants, and increased use of interest rate floors.

Nonetheless, results also showed some net easing in terms of narrower loan margins across all firm sizes and longer loan maturities, particularly for loans to large middle market enterprises, SMEs and microenterprises.

The central bank said that, over the next quarter, the majority of the respondent banks were expected to tighten overall credit standards on the back of a more uncertain economic outlook, expected deterioration in borrowers’ profiles as well as worsening of industry- or firm-specific outlook, and banks’ lower tolerance for risk.

According to the survey, 60.6 percent of respondent banks also reported a tightening of overall credit standards for loans extended to households during the quarter.

Results based on the diffusion index approach showed net tightening of credit standards for household loans. The net tightening was also observed across all types of consumer loans, including housing, credit card, auto and personal or salary loans.

The surveyed banks cited less favorable economic outlook, a reduced tolerance for risk and a deterioration in borrowers’ profile and profitability of banks’ portfolios as major factors that contributed to the tightening of credit standards for loans to households.

In terms of specific credit standards, the overall net tightening of credit standards for loans to households was manifested in reduced credit line sizes; stricter collateral requirements and loan covenants, and increased use of interest rate floors by respondent banks.

However, some form of easing of credit standards was also noted in terms of narrower loan margins across all types of loans to households, and longer loan maturities, specifically for housing, auto and personal or salary loans.

Most lenders also saw a decrease in overall demand for loans from both enterprises and households in the second quarter of 2020, but expect this to rise in the third quarter. INQ