Banks were stricter when lending to companies in the first quarter of 2017, but maintained their rules on household loans, the Bangko Sentral ng Pilipinas (BSP) reported on Friday.
Based on the central bank’s First Quarter 2017 Senior Bank Loan Officers Survey (SLOS), credit standards—as measured by the diffusion index (DI) approach—pointed to a net tightening on loans sought by enterprises.
A positive DI indicates that the proportion of banks that tightened credit standards is greater than those that did otherwise. A negative DI indicates more banks relaxed their rules.
The DI for enterprises rose to 6.7 percent in the first quarter from the 3.4 percent in the last three months of 2016.
“In terms of specific credit standards, DI-based results indicated stricter loan covenants as well as increased use of interest rate floors, despite narrower loan margins, increased credit line sizes, longer loan maturities and unchanged collateral requirements,” Ruby Anne Lemence of the BSP Department of Economic Research said in a press briefing.
An analyst associated tighter credit standards to external developments as domestic conditions remain favorable.
“Banks tightened their lending standards in the first quarter of 2017, likely due to heightened caution in the market as a result of uncertainties, including the US interest rate normalization,” said Land Bank of the Philippines market economist Guian Angelo Dumalagan.
On March 15, the Federal Reserve raised its benchmark interest rate by a 25 basis points amid rising confidence that the US economy is poised for more robust growth.
“The change in lending policies was most probably not a result of poor domestic economic prospects, as the local economy is expected to show stronger growth, helped by increased infrastructure spending,” Dumalagan said.
Respondent banks anticipate tighter credit standards in the second quarter, largely on account of industry expectations of stricter financial system regulations and lower tolerance for risk, according to the survey.
It also found the overall credit standards for household loans remained unchanged in the first quarter as banks that reported overall easing of credit standards equaled those that reported tighter credit standards.
“The unchanged credit standards were attributed by respondent banks largely to their sustained tolerance for risk, steady profile of borrowers, and a stable economic outlook,” BSP’s Lemence said.
The responses to the survey indicated the overall credit standards for housing and personal and salary loans were largely unchanged during the quarter.
“In terms of specific credit standards, results based on the DI approach indicated unchanged loan margins, collateral requirements, loan covenants and loan maturities for loans extended to households,” she added.
Banks expect a net easing of overall credit standards across all types of household loans—except auto loans—in the second quarter, anticipating a higher tolerance for risk, an improvement in the profitability of portfolios and borrowers’ profiles, and expectations of less strict financial system regulations.
The survey helps the central bank enhance its understanding of banks’ lending behavior, which is an important indicator of the strength of credit activity in the country.
It also helps assess demand conditions, potential risks in asset markets and possible strains in bank lending as a transmission channel of monetary policy.