Banks keep credit standards tight

MANILA, Philippines - Local banks continued to tighten their credit standards for loans to companies, but maintained those for households during the first quarter of the year, the Bangko Sentral ng Pilipinas (BSP) reported.

Based on the central bank’s Senior Bank Loan Officers’ Survey, overall credit standards for business loans to enterprises saw a net tightening in the first three months using the diffusion index approach.

“(This reflects) respondent banks’ perception of stricter financial system regulations, less favorable economic outlook, and reduced tolerance for risk,” the BSP said.

The diffusion index for lending requirements to companies stood at 6.7 percent during the first quarter.

However, banks’ responses indicated that the tightening was implemented across all firm sizes, except microenterprises which actually experienced a net easing on credit standards.

For specific credit standards, results of the survey showed stricter loan covenants, as well as increased use of interest rate floors despite narrower loan margins, increased credit line sizes, longer loan maturities and unchanged collateral requirements.

Some banks expect a continued tightening of credit standards over the next quarter due to expectations of stricter financial system regulations and lower tolerance for risks.

Meanwhile, the diffusion index approach of the survey also showed that overall credit standards – including loan margins, collateral requirements, loan covenants, and loan maturities – to households remained unchanged during the period.

“The unchanged credit standards were attributed by respondent banks largely to their sustained tolerance for risk, steady profile of borrowers, and a stable economic outlook,” the central bank said.

Credit requirements for housing and personal or salary loans were maintained in the first quarter while those for credit card loans and auto loans were tightened.

A net easing for credit standards across all types of household loans, except auto loans, are expected in the second quarter as banks expect higher tolerance for risk, improvement in the profitability of their portfolio and borrowers’ profiles and expectations of less strict financial system regulations.

Results of the survey using the diffusion index approach also indicated a net increase in loan demand across all firm sizes and types of household loans – except auto loans. This net increase in loan demand, both for enterprise and households, is seen to persist over the next quarter.