BSP notes reduced risk tolerance, less favorable outlook
COMMERCIAL BANKS tightened their lending standards for companies and households during the fourth quarter of 2016, mainly due to their less favorable economic outlook and reduced risk tolerance, the central bank said on Friday.
The lenders are also set to keep the stricter standards for corporate lending in the first quarter of this year as they indicated in a survey, it added.
Based on the central bank’s Fourth Quarter 2016 Senior Bank Loan Officers Survey (SLOS), credit standards—measured by the diffusion index (DI)—pointed to a net tightening on loans sought by enterprises and households.
For lending to companies, the diffusion index in the fourth quarter stood at 3.4 percent, up from a negative 3.2 a year earlier.
For households, the DI rose to 5 percent in the quarter from negative 9.1 percent a year ago.
A positive DI indicates the proportion of banks that tightened credit standards is greater than those that did otherwise, while a negative count indicates more banks relaxed their rules.
The net tightening of credit standards for firms reflected the banks’ less favorable economic outlook, deterioration in the profitability of banks’ portfolio and perceived stricter financial system regulations.
“In terms of specific credit standards, the DI-based results indicated stricter collateral requirements and loan covenants, as well as increased use of interest rate floors amid narrower loan margins, increased credit line sizes and longer loan maturities,” the central bank said.
In terms of borrower firm size, banks’ responses showed net tighter overall credit standards for large middle-market enterprises while those for top corporations, small and medium enterprises (SMEs), as well as micro enterprises, were unchanged.
‘Mind your exposure’
For the first quarter of 2017, the banks expect credit standards to tighten largely on account of a less favorable outlook on the economy, as well as expectations of deterioration in the profitability of bank portfolios, stricter financial system regulations and lower tolerance for risk.
“I think it is important that the banks are also conscious of their exposure. It means that there is better due diligence, investigation, etc,” BSP Deputy Governor Diwa Guinigundo told reporters in a briefing on Friday.
Year 2017 promises to be a more challenging year, so banks consider it to be a challenging one for extending credit, he said.
Guinigundo tried to assure banks. “But the Philippine economy has sufficient buffers so that we should not be pessimistic or nervous in riding out the challenges of 2017,” he added.
Tighter overall for housing, auto loans
The survey found the overall credit standards for household loans were tightened in the fourth quarter, with banks that imposed stricter credit standards outnumbering those that eased their rules.
“The tighter credit standards were attributed by respondent banks largely to their reduced risk tolerance and deterioration in borrowers’ profile,” the survey said.
In terms of loan categories, banks’ responses indicated a net tightening of overall credit standards for housing loans and auto loans during the quarter.
Meanwhile, the overall credit standards for credit card loans showed a net easing while those for personal/salary loans were unchanged based on the DI approach.
Easing seen in Q1 2017
For the next quarter, banks expect a net easing of overall credit standards across all types of household loans (except credit card loans), as respondent banks foresee a higher tolerance for risk, improvement in borrowers’ profiles and more aggressive competition from banks and non-bank lenders, among others.
The SLOS was conducted to enhance the understanding of banks’ lending behavior as an important indicator of the strength of credit activity in the country.
The survey also helps assess demand conditions, potential risks in asset markets and possible strains in bank lending as a transmission channel of monetary policy.