Banks maintained lending standards for loans to businesses and households in the third quarter, according to the latest Senior Bank Loan Officers’ Survey conducted by the Bangko Sentral ng Pilipinas.
This was based on the modal approach, where the results of the survey are analyzed by looking at the option with the highest share of responses,
Results from the diffusion index method, however, presented mixed trends as credit standards for firms generally reflected a net tightening, while loan standards for households revealed a net easing.
In the diffusion index approach, a positive diffusion index for credit standards indicates that the proportion of respondent banks that have tightened their credit standards exceeds those that eased, while a negative diffusion index for credit standards indicates that more respondent banks eased their credit standards compared to those that tightened.
The Q3 2022 modal-based results showed that a majority of the bank respondents (77.1 percent) specified broadly unchanged credit standards for loans to enterprises. The diffusion index approach indicated a net tightening of overall credit standards across all borrower firm sizes.
“Participating banks also reported that the overall tightening of credit standards was driven by the deterioration of borrowers’ profiles, reduced risk tolerance, a more uncertain economic outlook and stricter financial system regulations,” the BSP said.
On specific lending standards, the net tightening of overall credit standards was observed through increased use of interest rate floors, stricter collateral requirements and loan covenants, shortened loan maturity and wider loan margins.
Results showed that for the fourth quarter, a larger number of the surveyed banks anticipate generally unchanged credit standards for businesses.
The diffusion-index based results, however, reflected expectations of a net tightening of lending standards due to the decline in tolerance for risk, deterioration in borrowers’ profiles, and less optimistic economic outlook.
The survey also showed that most of the respondent banks (64.9 percent) retained their credit standards for loans extended to households. However, a net easing of overall credit standards for consumer loans was observed based from the diffusion index approach, which was attributed by respondents to an increased tolerance for risk, improvement in borrowers’ profiles and profitability of banks’ portfolios as well as less uncertain economic prospects.
In terms of specific credit standards, net easing was shown in the longer loan maturity of housing loans and personal/salary loans as well as increased size of credit lines for credit card loans. Net tightening of lending standards for consumer loans was revealed through tighter collateral requirements and loan covenants, wider loan margins, reduced size of credit lines (particularly for housing loans, auto loans, and personal/salary loans), and increased use of interest rate floors.
The Q3 2022 survey results pointed to the majority of bank respondents indicating broadly steady credit demand from both firms and consumers, based on the modal approach. Meanwhile, results from the diffusion index method indicated a net rise in overall loan demand from across all firm classifications and main categories of household loans (namely housing loans, credit card loans, and personal/salary loans).
“The general net increase in credit demand from enterprises was reportedly due to improvement in customers’ economic outlook and increase in customer inventory and accounts receivable financing needs. Similarly, the overall net rise in consumer loan demand was associated with higher household consumption, lower income prospects, and banks’ more attractive financing terms,” the BSP said.
Meanwhile, the survey indicated that a larger proportion of bank participants (73.5 percent) responded with unchanged overall loan standards for commercial real estate loans. Meanwhile, the diffusion index-based approach showed a net tightening of credit standards for commercial real estate loans in the third quarter 2022 for the 27th consecutive quarter mainly driven by decline in risk tolerance, deterioration in borrowers’ profiles, and more pessimistic economic expectations.
Over the next quarter, the modal results showed that majority of respondents continue to expect unchanged lending standards for commercial real estate loans while the diffusion index-based approach pointed to respondents’ anticipations of net tighter loan standards for these kinds of loans.
In the case of housing loans in the third quarter, most of the surveyed banks (71.9 percent) responded with generally unchanged credit standards as indicated by the modal approach. Similar to the previous survey, the diffusion index-based results pointed to a net easing of credit standards for residential real estate loans which was attributed to increased risk tolerance, less uncertain economic prospects, and an improvement in borrowers’ profiles and profitability of banks’ portfolios.
The BSP has been conducting the 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. The survey also helps the BSP assess the robustness of credit demand, prevailing conditions in asset markets, and the overall strength of bank lending as a transmission channel of monetary policy.
The survey consists of questions on loan officers’ perceptions relating to the overall credit standards of their respective banks, as well as to factors affecting the supply of and demand for loans to both enterprises and households.