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Banks maintain stricter lending standards

MOST BANKS maintained strict lending standards last quarter and expect to continue to do so in the coming months due to sustained worries amid the pandemic, even as some economic indicators show signs of improvement, a survey by the Bangko Sentral ng Pilipinas (BSP) released Thursday showed.

The latest Senior Bank Loan Officers’ Survey released by the BSP showed most respondent banks maintained their credit standards for both enterprises and households during the October to December period, based on the modal approach.

“The latest survey results reflected a slight improvement compared to the Q3 2020 survey where almost half of the respondent banks stated that they tightened credit standards amid the continued economic and business disruptions caused by the ongoing COVID-19 pandemic,” the central bank said in a statement.

Meanwhile, based on the diffusion index (DI) approach, there was a net tightening of overall credit standards for both enterprises and households last quarter, similar to the previous three-month period.

“Banks tightened their lending standards anew on concerns of a further escalation in non-performing loans,” BSP Officer-in-Charge Francisco G. Dakila, Jr. said in an online briefing.

“Nonetheless, the BSP remains confident in the soundness and resilience of the banking sector, as capital adequacy ratios have stayed well above the mandatory standards,” he added.

Previous results of the survey showed banks have generally tightened credit standards since the second quarter of last year, reflecting worries over an increase in soured loans.

The Senior Bank Loan Officers’ Survey, which assesses banks’ lending decisions, reflected answers from 45 out of 64 banks surveyed from Nov. 25, 2020 to Jan. 11 for a response rate of 70.3%.

More than half or 63.4% of the respondent banks reported unchanged credit standards for loans to enterprises last quarter, based on the modal approach.

The DI approach meanwhile showed a net tightening of lending standards across borrower firms of all sizes.

“As indicated by respondent banks, the observed tightening of overall credit standards was largely due to less favorable economic outlook, deterioration in the profitability of bank’s portfolio and profiles of borrowers, and reduced tolerance for risk, among other factors,” the BSP said.

“On specific credit standards, the net tightening of overall credit standards was reflected in terms of reduced credit line sizes; stricter collateral requirements and loan covenants; and increased use of interest rate floors. Meanwhile, some form of easing was revealed in terms of narrower loan margins and longer loan maturities,” it added.

The modal approach showed banks expect their credit standards for enterprises to remain unchanged this quarter. However, DI-based results showed some banks continue to expect tighter standards “due to a more uncertain economic outlook” and a conservative risk appetite as firms continue to reel from the impact of the pandemic.

Majority or 77.8% of respondent banks likewise said they maintained their credit standards for household loans last quarter, based on the modal approach.

The DI-based results however showed a net tightening of overall standards for credit to households like housing and personal or salary loans due to dim economic prospects and reduced tolerance for risk. Meanwhile, standards for credit card and auto loans remained unchanged as equal portions of respondent banks said they tightened or eased their criteria for these.

“In terms of specific credit standards, the overall net tightening of credit standards for loans to households was revealed in reduced credit line sizes and stricter loan covenants,” the central bank said.

“Meanwhile, some easing of credit standards for loans to households was also observed in terms of narrower loan margins, less restrictive collateral requirements, longer loan maturities, and decreased use of interest rate floors,” it added.

For this quarter, majority of respondent banks said they expect to retain their credit standards, based on the modal approach.

Meanwhile, DI-based results showed an expected tightening in loan standards for households as the pandemic’s economic impact has affected borrowers’ capacity to pay.

Most of the respondent banks see unchanged loan demand from both enterprises and households this quarter, indicating an increase in confidence of firms and consumers amid the gradual rise of economic activities, the modal approach showed.

DI-based results meanwhile showed expectations of a net increase in overall loan demand from businesses as they seek financing. Consumers are also expected to borrow due to higher household consumption, lower income prospects, and lack of other sources of funds.

Amid tighter credit standards and weak borrower confidence, lending growth slumped to 0.3% year on year in November, the slowest since the 1.9% in September 2006.

Banks’ non-performing ratio stood at 3.81% as of end-November, rising from the 3.72% in October as well as the 2.19% a year earlier, based on BSP data, as bad loans surged 73.6% year on year to P404.687 billion in November. — L.W.T. Noble

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