Despite rate hikes, banks see steady loan growth

MANILA, Philippines — The series of interest rate hikes implemented to keep inflation expectations well anchored failed to dampen loan demand from both enterprises and households, a survey conducted by the Bangko Sentral ng Pilipinas (BSP) showed.

Ruby Anne Lemence of the central bank’s Department of Economic Research said responses to the question on loan demand in the Q3 2018 Senior Bank Loan Officers’ Survey (SLOS) indicated a net increase in loan demand across all firm sizes and all types of household loans using the diffusion index approach.

Banks attributed the net increase in loan demand to their customers’ higher working capital requirements as well as increased investment in plant or equipment, and improvement in corporate customers’ economic outlook in the quarter.

Lemence said respondent banks also attributed the net increase in loan demand to increased household consumption and more attractive financing terms offered by banks, among others.

For this quarter, Lemence said there was a net increase in overall loan demand for business loans as respondent banks anticipate that their corporate clients would need higher working capital and increase their investment in plant or equipment in the next quarter.

Lemence said a larger proportion of respondents expect overall demand for household loans to increase in the fourth quarter relative to those who indicated the opposite.

“The anticipated net increase in household loan demand was attributed by respondent banks to higher household consumption and investment and banks’ more attractive financing terms,” she said.

The BSP’s Monetary Board has so far raised interest rates by 150 basis points in four straight rate-setting meetings since May to curb rising inflationary pressures.

Inflation leapt to 6.7 percent in September from 6.4 percent in August, bringing the average to five percent in the first nine months and exceeding the central bank’s two to four percent target.

Latest data from the BSP showed bank lending grew 18.9 percent to P7.84 trillion as of end- August.

 Lemence said the survey showed a net tightening of credit standards for both loans to enterprises due to stricter financial system regulations as well as stricter collateral requirements and loan covenants as well as increased use of interest rate floors.

She added there was also a net tightening of credit standards for household loans, particularly for auto loans and personal/salary loans reflecting reduced credit line sizes, stricter collateral requirements and loan covenants, shorter loan maturities, and increased use of interest rate floors.

Respondent banks attributed the tightening of overall credit standards for household loans to their reduced tolerance for risk, deterioration in the liquidity of banks’ portfolio as well as  borrowers’ profiles and the less favorable economic outlook.

The BSP has been conducting the SLOS 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. It helps the BSP assess the robustness of credit demand conditions as well as conditions in asset markets, and the overall strength of bank lending as a transmission channel of monetary policy.