Coronavirus pushes more banks to tighten credit standards in Q1 2020

Ralf Rivas

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Coronavirus pushes more banks to tighten credit standards in Q1 2020
Majority of banks say they have maintained credit standards, but more have started reporting tighter rules as the coronavirus pandemic raises economic risks

MANILA, Philippines – The Bangko Sentral ng Pilipinas (BSP) on Friday, April 23, said bank lending standards remained broadly steady for the 1st quarter of 2020. But at the same time, more banks have reported tightening amid the economic uncertainties during the coronavirus pandemic.

Results of the Senior Bank Loan Officers’ Survey (SLOS) showed 66.7% of banks that responded to the survey maintained credit standards for loans to enterprises during the 1st quarter. This figure uses the modal approach, which basically looks at the highest share of responses.

However, the SLOS also found a net tightening of credit standards using the Diffusion Index (DI) approach. The DI approach checks the proportion of respondent banks that have tightened or eased their credit standards.

Respondents that reported tightening cited stricter financial system regulations, deterioration of borrowers’ profiles as well as in the profitability and liquidity of banks’ portfolios, and a reduced tolerance for risk.

Banks also pointed to a net tightening of credit standards across all borrower firm sizes from top corporations, large middle-market enterprises, small and medium enterprises, and micro-enterprises based on the DI approach.

Household lending

For household lending, a big majority or 69.6% reported that they kept their overall credit standards unchanged.

However, results based on the DI approach indicated net tightening of credit standards for household loans, attributed largely to an uncertain economic outlook and reduced tolerance for risk. 

“The overall net tightening of credit standards for loans to households also reflected stricter collateral requirements and loan covenants as well as increased use of interest rate floors by respondent banks for the said type of loan,” the BSP said.

Loan demand

Majority of banks indicated that loan demand was stable from both enterprises and households during the quarter. 

Banks that have reported tightening likewise noted an increase in loan demand, as customers invested more in facilities or equipment amid lower interest rates.

Banks also cited higher household consumption and housing investment, as well as lack of other sources of funds as reasons, for the overall net increase in household loan demand for the quarter.

For the 2nd quarter, most respondent banks expect steady overall loan demand from firms and households. 

However, DI results suggested expectations of an increase in overall demand for business loans, but a decrease in household loans. 

For business loans, the expected net increase in demand was associated largely with corporate clients’ higher working capital requirements, a decline in internally-generated funds, and increased inventory financing needs of clients. 

Meanwhile, the anticipated net decrease in household loan demand in the 2nd quarter is attributed largely to less attractive financing terms and availability of other sources of funds.

Real estate

For real estate loans, most or 80% of respondent banks said overall standards for commercial real estate loans were kept steady.

However, the DI approach pointed to a tightening in standards due to a less favorable economic outlook, deterioration in the liquidity of banks’ portfolios and borrowers’ profiles, and a reduced tolerance for risk.

Demand for commercial real estate loans was also unchanged in the 1st quarter based on both the modal and DI approaches. 

For the 2nd quarter, more banks expect a decrease in demand for commercial real estate loans compared to those expecting an increase amid a deterioration in economic outlook.

The SLOS was conducted from February 28 to April 7. The BSP noted that some responses may not yet reflect the central bank’s measures to alleviate the effects of the COVID-19 pandemic.

The BSP has lowered interest rates and reduced the amounts banks need to hold in its reserves to encourage borrowing amid the pandemic. –

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Ralf Rivas

A sociologist by heart, a journalist by profession. Ralf is Rappler's business reporter, covering macroeconomy, government finance, companies, and agriculture.