Banks tighten loan rules for real estate, housing

MANILA, Philippines – Banks tightened their standards for commercial real estate and housing loans in the first quarter amid the deterioration in borrowers’ profile and stricter financial system regulations.

Jeny Tabin, bank officer at the BSP’s Department of Economic Research, said the central bank’s 1st Quarter 2016 Senior Loan Officers Survey showed a net tightening of overall credit standards for commercial real estate and housing loans in the first three months.

Tabin explained the tighter overall credit standards for commercial real estate loans reflected respondent banks’ reduced tolerance for risk, deterioration in the profile of borrowers, and perception of stricter financial system regulations.

“In terms of specific credit standards for commercial real estate loans, banks’ responses showed wider loan margins, reduced credit line sizes, stricter collateral requirements, and increased use of interest rate floors,” Tabin said.

Tabin said demand for commercial real estate loans was also unchanged in the first quarter.

However, Tabin revealed a number of banks indicated increased demand for the said type of loan on the back of clients’ improved economic outlook and increased working capital and inventory financing needs of customers, among others.

“Over the next quarter, although most of the respondent banks anticipate generally steady loan demand, a number of banks expect demand for commercial real estate loans to increase further,” she said.

Data showed lending to real estate activities cornered the biggest share with 17.1 percent of the bank’s total loan portfolio last year. Loans to the sector surged 18.8 percent to P874.25 billion last year from P735.71 billion in 2014.

In June 2014, the BSP introduced stricter rules on banks’ real estate exposure to ensure that lenders have enough capital to absorb any potential losses. The new measure simply reinforces the prudential policy that banks must have sufficient capital to absorb any potential shock on its credit exposures.

The pre-emptive macroprudential policy measure approved by the Monetary Board required stress tests for banks to determine if their capital will be enough to absorb credit risk that may arise from their exposure to the property sector.

The BSP explained that universal, commercial, and thrift banks would need to meet a capital adequacy ratio of 10 percent of their qualifying capital following the stress test results.

Moreover, universal and commercial banks, along with their thrift bank subsidiaries will also need to keep a Common Equity Tier 1 level of at least six percent of their qualifying capital. Stand-alone thrift banks, meanwhile, are required to maintain a Tier 1 ratio of six percent of their qualifying capital.