Bank lending seen to remain weak

MANILA, Philippines — Economists expect bank lending to remain in the red in the coming months amid lack of demand from borrowers and banks turning risk-averse due to uncertainties brought about by the COVID-19 pandemic.

ING Bank senior economist Nicholas Mapa said loans disbursed by big banks may continue to drop as demand for credit remains soft.

“We expect bank lending to remain in the red for the next few months but eventually revert to growth by the fourth quarter as base effects fade and economic activity improves,” Mapa said.

Lending by universal and commercial banks contracted for the sixth straight month in May, albeit at a slower pace of four percent from five percent in April.

“The May downturn was less severe than the five percent drop in April, suggesting that rate cuts by the BSP in late 2020 are beginning to take hold,” Mapa said.

Earlier, the BSP indicated that policy moves tend to operate with a six- to nine- month lag.

“We could see the early signs of these accommodative moves feeding through to the economy,” Mapa said.

The recession extended to five quarters with gross domestic product (GDP) shrinking by 4.2 percent in the first quarter of the year from 8.3 percent in the fourth quarter amid the resurgence of COVID-19 cases.

“Bank lending has also failed to bounce back sharply despite aggressive easing by the central bank as banks tack on a risk premium to account for the uncertainty in the economic landscape, with financial institutions not able to pass on lower borrowing costs to would be clients,” Mapa said.

Rizal Commercial Banking Corp. chief economist Michael Ricafort said the decline in bank lending largely reflects slower demand for loans, consistent with slower economic conditions brought about by the COVID-19 lockdowns.

Ricafort said the continued contraction could also be partly attributed to less reliance on bank loans by some of the country’s conglomerates that pursued increased fund-raising activities in the capital markets, especially through the bond and stock markets.

“Going forward, continued contraction in loan demand could still support/justify more accommodative monetary policy measures, provided inflation stabilizes from two-year highs especially by way of further cuts in banks’ reserve requirement ratio or sustaining the key policy rate at the record low of two percent,” Ricafort said.

Ricafort said the economy needs all the support measures it could get at this time largely due to the adverse economic effects of the COVID-19 pandemic.