banks in the Philippines

Bangko Sentral encourages lending for economy, but banks tighten up

Ralf Rivas
The Bangko Sentral ng Pilipinas lowers interest rates to shore up the economy, but banks become stricter with credit standards

The Bangko Sentral ng Pilipinas (BSP) trimmed interest rates and the amount banks need to hold in their reserves, in a bid to spark economic activity due to the coronavirus pandemic. Banks, however, tightened overall credit standards, as the economy dives into recession.

Latest data from the BSP’s Senior Bank Loan Officers’ Survey showed that 69.4% of banks tightened lending standards for enterprises during the 2nd quarter of 2020.

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

Meanwhile, 60.6% of banks reported stricter requirements for household loans, and 55.6% reported tightening for real estate loans.

Banks said this was due to the country’s less favorable economic outlook, deterioration in the profiles of borrowers, and banks’ reduced tolerance for risk, among other factors.

During the 2nd quarter, banks reduced credit line sizes, became stricter with collateral requirements and loan covenants, and increased the use of interest rate floors.

However, banks eased up in terms of loan maturities, particularly for loans to large-middle market enterprises, small and medium enterprises, and micro-enterprises, as well as loans for housing, auto, and salary loans.

Banks added that they would still be strict in the 3rd quarter, as the Philippines dives into recession.

The country’s overnight reverse repurchase rate is at 2.25%, the lowest in history, while the reserve requirement ratio (RRR) is at 14%.

Low interest rates, in theory, would encourage consumers to borrow, and in turn, boost the economy. Meanwhile, lowering the RRR or the amount banks need to keep in their reserves would allow banks to have more money to loan to consumers.

Loan demand

Amid the tightening of requirements, banks also saw a decrease in overall demand for loans from both enterprises and households during the 2nd quarter.

This was mainly due to the deterioration in clients’ business prospects amid the lockdown and the decline in customer inventory financing needs and working capital requirements, which was attributed in turn to the delay in investment plans in plants 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 2nd quarter.

Over the 3rd quarter, most respondent banks expect an increase in demand for business loans, as well as for credit card and personal and salary loans, as the economy reopens.

For commercial real estate loans, banks saw an unchanged demand from the 1st quarter. Over the 3rd quarter, a higher number of respondent banks anticipated a generally steady loan demand in real estate loans.

But for housing loans extended to households, 60% reported tightening their credit standards. At the same time, the majority of the respondent banks expect overall credit standards for housing loans to tighten over the 3rd quarter amid more uncertain economic prospects, deterioration in borrowers’ profile, and lower risk tolerance of banks.

For the 3rd quarter, more banks see continued lower demand for housing loans, as consumers use up cash to repay postponed bills, as well as concerns over employment and income level.

Loan loss buffer

Due to the pandemic, banks have drastically increased their loan loss provisioning, in turn affecting earnings.

BDO, the country’s largest bank in terms of assets, saw a 79% plunge in its earnings in the 1st semester of the year.

BDO booked total provisions of P22.4 billion in anticipation of potential delinquencies due to the coronavirus pandemic.

Gross non-performing loan (NPL) ratio increased to 1.95%, while NPL cover settled at 139.4%. Other banks have also reported increases in loan loss buffers in the 1st quarter, and are expected to raise their buffers even more. –

Ralf Rivas

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