Banks tighten lending standards anew in Q3

MANILA, Philippines - Banks continued to tighten credit standards for loans to enterprises and households through stricter collaterals requirements and loan covenants, a survey conducted by the Bangko Sentral ng Pilipinas (BSP) showed. 

BSP bank officer IV Jeny Tabin said the central bank’s latest Senior Loan Officers Survey showed a net tightening of overall credit standards for loans extended to business and households in the third quarter of 2016 using the diffusion index approach. 

“The tighter overall credit standards was attributed by respondent banks to deterioration in the profitability of bank’s portfolio, less favorable economic outlook, perceived stricter financial system regulations, banks’ reduced tolerance for risk, and deterioration of borrowers’ profiles,” she said. 

The DI for credit lines to enterprises stood at 6.9 percent in the third quarter from 6.5 percent the previous quarter. 

In terms of specific credit standards, she said the net tightening of overall credit standards for business loans reflected overall stricter loan covenants and collateral requirements as well as increased use of interest rate floors across all firm sizes, except micro enterprises. 

In terms of borrower firm size, banks’ responses showed net tightening of overall credit standards for loans to top corporations, large middle-market enterprises and small and medium enterprises (SMEs) while those for micro enterprises indicated net easing based on the DI approach. 

For the fourth quarter, she said some respondent banks expect credit standards to tighten over the next quarter largely on account of banks’ less favorable outlook on the economy as well as expectations of deterioration in the profitability of their loan portfolio. 

Tabin also said overall credit standards for loans extended to households also showed a net tightening of overall credit standards for household loans in the third quarter. 

“The tighter credit standards were attributed by respondent banks largely to their perception of stricter financial system regulations. In particular, banks’ responses indicated wider loan margins for housing loans and auto loans, and tighter collateral requirements for housing loans, auto loans and personal or salary loans,” she added. 

For the next quarter, Tabin said the DI approach showed expectations of net easing of overall credit standards across all types of household loans except auto loans. 

According to Tabin, respondent banks expect higher tolerance for risk, an improvement in borrowers’ profiles, and more aggressive competition from banks and non-bank lenders. 

Using the modal approach, Tabin said banks reported unchanged credit standards for loans to businesses and households in the second quarter of the year. 

This is the 30th consecutive quarter since the second quarter of 2009 that majority of banks reported broadly unchanged credit standards using the modal approach. 

About 93.1 percent of the respondent banks indicated that credit standards for loans to enterprises remained unchanged while 90 percent reported unchanged standards for loans extended to households.