Loans by commercial banks dropped 0.6 percent to P1.58 trillion, the Bangko Sentral ng Pilipinas (BSP) said.
It was the second slide in four months. Lending also fell in March. Loans to manufacturers, which made up a quarter of the total, declined 7.1 percent.
The BSP last week held its key interest rate at the highest since 1992 for a 10th meeting.
"We’ve gone from really low to really high interest rates," said Luz Lorenzo, an economist at ATR-Kim Eng Capital Partners Inc. "And there isn’t much borrowing because of political volatility.’’
Loans to traders, 12 percent of the total, slipped 3.4 percent while construction lending, 1.5 percent of the total, fell 13 percent.
The BSP last week said a cut in borrowing costs to spur growth is "possible" after keeping its benchmark lending rate unchanged at 7.5 percent. Capital investment on items such as plant for factories has slid for five consecutive quarters, including the first, according to national income accounts.
"Bank lending activity continues to be weak as banks remain generally cautious, given the present level of non-performing assets,’’ the BSP said. The ratio of bad loans to total lending dropped to 7.2 percent in June, compared with a peak of 19 percent in 2001. They were as low as three percent in 1997, before the Asian financial crisis.
Loans "are the lifeline of firms, specifically small and medium enterprises," said Ces Tanchoco, an economist at Bank of the Philippine Islands in Manila. Economic "growth could be much stronger."
The lack of credit information has also been cited as an important factor for weak bank lending. The BSP’s support for the credit information bill in Congress is expected to address this aspect of credit weakness.
"The BSP remains committed to strengthening the financial sector by helping banks improve the quality of their assets and providing the appropriate macroeconomic conditions to encourage higher demand for credit," said the BSP.
Earlier, the BSP said it expects KB lending to pick up gradually over the near term as banks, strengthen their balance sheets and the economy continues to consolidate.
The radio of commercial banks’ bad loans to total lending narrowed to 7.22 percent at the end of June from 7.36-percent sheets and the economy continues to consolidate.
The ratio of commercial banks’ bad loans to total lending narrowed to 7.22 percent at the end of June from 7.36 percent at the end of May and 9.21 percent in the same month last year.
On the other hand, non-performing loans declined by 3.28 percent to P136.51 billion last June from the end-May level.
The relocation of some manufacturers to China may also account for the drop in lending, said Bing Icamina, an economist at AYC Consultants Inc., a Manila-based adviser to businesses.
"Heavy industries aren’t here anymore, light manufacturing has moved to China," Icamina said. "There’s not much opportunity to lend out."
Matsushita Electric Industrial Co. and Toshiba Corp. are among manufacturers that have shifted some production to China from the Philippines, where transportation problems and expensive, fluctuating power supply damps sales and investment.
Matsushita Electric, the world’s largest electronic maker, closed its mobile-phone assembly plant in the Philippines in December, while Toshiba in 2004 moved notebook assembly operations to China. Shipments of electronics, more than half of the country’s overseas sales, slowed to a six percent gain in June from a 10 percent increase in May.