Banks tighten household credit standards

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Enterprise credit standards unchanged, BSP survey reveals Banks tightened credit rules for household loans during the third quarter, but kept their overall lending standards for enterprises, the Third Quarter 2014 Senior Bank Loan Officers Survey (SLOS) showed.

According to the survey conducted by the Bangko Sentral ng Pilipinas (BSP), the number of banks that indicated tightening of overall credit standards for household loans increased in Q3, while those who said they were imposing tighter credit standards for enterprises equaled those that eased their standards.

The survey measurements were based on the diffusion index (DI) approach. A positive DI for credit standards indicates that the proportion of banks that have tightened their credit standards is greater than those that eased (“net tightening”), whereas a negative DI indicates that more banks have eased their credit standards than those that tightened (“net easing”).

In terms of household lending, the DI approach indicated a net tightening. The DI was recorded at 9.5 percent in Q3 from negative 5.3 percent a year earlier.


Tougher financing, prudential conditions

The BSP survey said that the tightened credit standards for households can be attributed to less aggressive competition among banks and non-bank lenders, and decreased access of lenders to money or bond market financing.

“In particular, banks’ responses indicated stricter collateral requirements and increased use of interest rate floors for all types of household loans,” it added.

Justino Calaycay, analyst at Accord Capital Equities Corp., suggested that the latest SLOS results are part of banks’ prudential measures to ensure the quality of their loan portfolio.

“It is easy to lend, but the key to sustaining banks’ margins is to ensure the capacity of the borrowers to meet the obligations therewith. This is especially important as the latest round of Basel III requirements come around,” Calaycay said.

The Basel III reforms were developed by the Basel Committee on Banking Supervision and are intended to strengthen the regulation, supervision and risk management of the banking sector. The main impact on banks is to require them to maintain higher levels of capitalization and liquidity to protect against financial shocks.

Tool for monitoring credit activity

The BSP explained that it has been conducting the SLOS since the first quarter of 2009 to enhance its understanding of banks’ lending behavior, which is an important indicator of the strength of the credit activity in the country.

“The survey also helps the BSP assess the robustness of demand conditions, potential risks in the asset market and possible strains in the bank lending channel as a transmission channel of monetary policy,” it stated.

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