Banks tighten lending standards in Q2 2020: BSP

July 27, 2020

Results of the Q2 2020 Senior Bank Loan Officers’ Survey (SLOS) showed that most of the respondent banks tightened their overall credit standards for loans to both enterprises and households during the quarter based on the modal approach.

This is the first time that the majority of respondent banks reported tighter credit standards following 44 consecutive quarters of broadly unchanged credit standards.

Consequently, the diffusion index (DI) approach likewise indicated a net tightening of overall credit standards for both loans to enterprises and households in Q2 2020. In the previous quarter, credit standards for business and consumer loans also showed a net tightening based on the DI approach.

The BSP has been conducting the SLOS since 2009 to gain a better understanding of banks’ lending behavior, which is an important indicator of the strength of credit activity in the country. The survey also helps the BSP assess the robustness of credit demand, prevailing conditions in asset markets, and the overall strength of bank lending as a transmission channel of monetary policy.[5] The survey consists of questions on loan officers’ perceptions relating to the overall credit standards of their respective banks, as well as to factors affecting the supply of and demand for loans to both enterprises and households.

The analysis of the results of the SLOS focuses on the quarter-on-quarter changes in the perception of respondent banks. Starting with the Q3 2018 survey round, the BSP expanded the coverage of the survey to include new foreign commercial banks and large thrift banks. Prior to Q3 2018, the survey covered only universal and commercial banks.

In the latest Q2 2020 survey round, survey questions were sent to a total of 64 banks (42 universal and commercial banks and 22 thrift banks), 51 of whom sent in their responses, representing a response rate of 79.7 percent. The response rate for Q2 2020 SLOS is higher compared to the previous survey round following the easing of lockdown measures and the transition to a general community quarantine in Metro Manila for the period 1 June to 15 July 2020 which covered the survey data collection period (1 June - 7 July 2020).

It should be noted that the period covered in the latest survey (Q2 2020) coincided with the period when strict lockdown measures implemented in response to the COVID-19 pandemic were still in effect, particularly the implementation of the Luzon-wide enhanced community quarantine (ECQ) from 17 March - 30 April 2020, prior to the start of the gradual easing of quarantine measures in some areas by May 2020.

  Details of survey results

Lending to enterprises 

Results based on both the modal and DI approaches pointed to a tightening of credit standards for business loans, as most banks (69.4 percent of banks that responded to the question) reported tighter overall credit standards for loans to enterprises during the quarter.

The overall tightening of credit standards was also noted across all borrower firm sizes, namely, top corporations, large middle-market enterprises, small and medium enterprises (SMEs), and micro-enterprises, as indicated by both modal- and DI-based results. Respondent banks attributed the tightening of credit standards largely to less favorable economic outlook, deterioration in the profiles of borrowers, and banks’ reduced tolerance for risk, among other factors.

Looking at specific credit standards, the net tightening of overall credit standards was reflected in the reduced credit line sizes; stricter collateral requirements and loan covenants; and increased use of interest rate floors. Nonetheless, results also showed some net easing in terms of narrower loan margins (across all firm sizes) and longer loan maturities (particularly for loans to large-middle market enterprises, SMEs, and micro-enterprises).

Over the next quarter, the majority of the respondent banks expect to tighten overall credit standards on the back of more uncertain economic outlook, expected deterioration in borrowers’ profiles as well as worsening of industry- or firm-specific outlook, and banks’ lower tolerance for risk.

Lending to households

Most respondent banks (60.6 percent) also reported a tightening of overall credit standards for loans extended to households during the quarter. Consequently, results based on the DI approach showed net tightening of credit standards for household loans. The net tightening of credit standards was also observed across all types of consumer loans, including housing, credit card, auto, and personal/salary loans.

Respondent banks cited less favorable economic outlook, a reduced tolerance for risk, and a deterioration in borrowers’ profile and profitability of banks’ portfolios as major factors that contributed to the tightening of credit standards for loans to households. In terms of specific credit standards, the overall net tightening of credit standards for loans to households was manifested in reduced credit line sizes; stricter collateral requirements and loan covenants; and increased use of interest rate floors by respondent banks. However, some form of easing of credit standards was also noted in terms of narrower loan margins (across all types of loans to households) and longer loan maturities (specifically for housing, auto, and personal/salary loans).

In terms of respondent banks’ outlook for the next quarter, results based on both the modal and DI approaches reflected expectations of net tighter overall credit standards for household loans, which respondent banks attributed to more uncertain prospects on the economy, banks’ lower tolerance for risk, and anticipated deterioration in borrowers’ profile and in the profitability of banks’ portfolios.

Loan demand

Responses to the survey question on loan demand indicated that most respondent banks saw a decrease in overall demand for loans from both enterprises and households in Q2 2020. Accordingly, results based on the DI approach also showed a net decrease in overall demand] for both business and household loans. The overall net decrease in loan demand from firms was associated by respondent banks mainly to the deterioration in clients’ business prospects amid the lockdown,  decline in customer inventory financing needs and working capital requirements, attributed in turn to delay in investment plans in plant or equipment. Meanwhile, respondent banks cited lower household consumption and housing investment as major reasons for the overall net decrease in household loan demand for the quarter.

Over the next quarter, most of respondent banks expect an increase in demand for business loans (across all firm sizes) as well as for credit card and personal/salary loans, reflecting in part expectation for pick up in domestic economic activity following the partial re-opening of the economy. DI-based results likewise suggested expectations of a net increase in overall demand for business loans, associated largely with corporate clients’ higher working capital requirements, lack of other sources of funds, decline in clients’ internally-generated funds, and a rise in customer inventory financing needs. For loans extended to households, DI-based results indicated expectations of a net decline in demand for housing and auto loans while demand for credit card and personal/salary loans pointed to a net increase. Respondent banks cited lower housing investment and household consumption as major reasons for the anticipated net decrease in demand for housing and auto loans for the next quarter. Meanwhile, the expected net increase in demand for credit card and personal/salary loans was attributed by respondent banks largely to lack of other sources of funds, lower income prospects, and higher household consumption among other factors.

Real estate loans

Most of the respondent banks (55.6 percent) reported that overall credit standards for commercial real estate loans (CRELs) tightened in Q2 2020. Meanwhile, the DI approach continued to point to a net tightening of overall credit standards for CRELs for the 18th consecutive quarter.

Respondent banks cited less favorable economic prospects and a deterioration of borrowers’ profiles as major factors for the tightening of overall credit standards for the said type of loan.

In terms of specific credit standards, the net tightening of overall credit standards for commercial real estate loans reflected wider loan margins, reduced credit line sizes, stricter collateral requirements and loan covenants, increased use of interest rate floors, and shortened loan maturities.

Over the next quarter, respondent banks anticipate tightening their credit standards for commercial real estate loans based on both the modal approach and DI-based results.

 Most of the respondent banks reported unchanged demand for commercial real estate loans in Q2 2020, while DI-based results indicated a net decrease in loan demand.

Over the next quarter, a higher number of respondent banks anticipated a generally steady loan demand in real estate loans. DI-based results, meanwhile, pointed to expectations of a net decrease in demand for CRELs due largely to anticipated deterioration in customers’ economic outlook. 

 For housing loans extended to households, most of the respondent banks (60.0 percent) reported tightening their credit standards in Q2 2020. At the same time, the majority of the respondent banks expect overall credit standards for housing loans to tighten over the next quarter amid more uncertain economic prospects, deterioration in borrowers’ profile, and lower risk tolerance of banks.

 Results based on both the modal and DI approaches pointed to a decrease in demand for housing loans in Q2 2020, which was attributed by respondent banks largely to reduced housing investment and household consumption, restrained by the implementation of the community quarantine.

Over the next quarter, more respondent banks continue to see lower demand for housing loans compared to those that anticipate a rise in loan demand for the type of loan amid expectations of a decrease in housing investment as expenditure plans will be weighed down by repayment of postponed bills payable during the lockdown, as well as consumers’ concerns over employment and income level.