Banks tighten loan standards in Q3

Banks continued to tighten lending standards for companies due to the deterioration in the profile of borrowers, according to a survey conducted by the Bangko Sentral ng Pilipinas (BSP).

Lara Romina Ganapin, acting deputy director of the BSP’s Department of Economic Research, said in a press conference that the third quarter 2019 Senior Loan Officers Survey showed a net tightening of credit standards for loans to enterprises.

Using the diffusion index (DI) approach, Ganapin said the results of the survey pointed to a net tightening of credit standards for business loans for top corporations, large middle-market enterprises as well as small and medium enterprises and microenterprises due to banks’ perception of a deterioration in the profile of borrowers, their reduced tolerance for risk, and less aggressive competition from banks and non-bank lenders.

She said the net tightening of overall credit standards was reflected in reduced credit line sizes, stricter collateral requirements and loan covenants, shortened loan maturities and increased use of interest rate floors.

On the other hand, Ganapin said credit standards for household loans remained unchanged in the third quarter amid steady tolerance for risks and unchanged profile of banks’ borrowers.

In terms of loan demand, Ganapin said banks noted a net increase in overall demand for business loans across all sizes, as well as household loans except for housing and auto loans.

“The overall net increase in loan demand from firms was attributed by banks largely to their customers’ higher working capital requirements. Meanwhile, respondent banks attributed the overall net increase in household loan demand to higher household consumption and banks’ more attractive financing terms,” Ganapin said.

For the fourth quarter, Ganapin said banks expect a net increase in overall loan demand for business due to the corporate clients’ higher working capital requirements, as well as households, due to higher consumption, lower interest rates, and more attractive financing terms offered by banks.

The BSP has so far slashed interest rates by 75 basis points this year, partially unwinding the tightening cycle that saw rates rise by 175 basis points last year.

It also slashed the level of deposits banks are required to keep with the central bank by 400 basis points for big and midsized banks and 200 basis points for small banks this year to free up much needed funds into the financial system.

Latest data showed credit growth slowed down to 10.5 percent in August from 11.1 percent in July due to the contraction of loans to the manufacturing sector.