Banks were stricter in lending to companies in the third quarter but did not tighten with regard to household loans, the Bangko Sentral ng Pilipinas (BSP) reported on Friday.
Based on the central bank’s Third Quarter 2017 Senior Bank Loan Officers Survey (SLOS), credit standards—as measured via the diffusion index (DI) approach—pointed to a net tightening for loans sought by enterprises.
A positive DI — it was a 3.7 percent in the third quarter — indicates that more banks tightened credit standards compared to those that did otherwise. A negative DI means more banks relaxed their lending rules.
“Results based on the DI approach indicated a net tightening of credit standards for business loans attributed to respondent banks’ less favorable economic outlook, perceptions of stricter financial system regulations and banks’ reduced tolerance for risk as well as a decline in borrowers’ profiles,” the BSP survey noted.
In terms of specific credit standards, the observed net tightening was reflected in stricter loan covenants and increased use of interest rate floors, particularly for loans to large middle-market enterprises and small- and medium-sized enterprises (SMEs).
In terms of borrower size, the banks’ responses indicted a net tightening of overall credit standards for loans to large middle-market enterprises and SMEs, with a net easing for loans to top corporations and micro-enterprises.
Some respondent banks expect overall credit standards for business loans to tighten over the next quarter, the survey found, largely on account of less favorable economic outlooks and a decrease in the profitability of bank portfolios.
Overall credit standards for household loans, meanwhile, remained unchanged in the third quarter.
“The maintained overall credit standards were attributed by respondent banks to their unchanged tolerance for risk and stable profile of their household borrowers, among others,” the Bangko Sentral said.
In terms of specific credit standards, results indicated unchanged collateral requirements, loan covenants and use of interest rate floors.
Over the next quarter, the survey showed expectations of an overall net easing, particularly for housing, credit card and auto loans, on the back of increased tolerance for risk and anticipated improvement in the profitability of bank portfolios along with a more favorable economic outlook.
The SLOS helps the Bangko Sentral 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.