Improving loan demand tempers bank lending slump in May

MANILA, Philippines — Bank lending contracted at a softer pace in May, bringing a good news to the Bangko Sentral ng Pilipinas which has been struggling to resuscitate demand for loans despite flooring interest rates to historic low.

Excluding lending to each other, outstanding loans of big banks sagged 4% year-on-year in May, easing from record 5% slump in April, the BSP reported Wednesday.

Still, this marked the sixth straight month of decline in lending. It’s a depressing trend that the central bank blamed on borrower’s fears of incurring more debts at a time the pandemic is roiling job markets, and lender’s decision to tighten access to credit as soured loans they hold build up.

This dangerous combo has become a huge roadblock to a much-criticized government strategy of relying on banks for recovery from a pandemic-induced meltdown. The BSP had said that its aggressive easing last year, which brought key rates at record-lows, have released over P2 trillion in liquidity to the financial system, but with banks not confident that the worst is over for the economy, cash is only circling back to the BSP's liquidity absorption facility.

“Credit activity has remained muted as the emergence of new coronavirus variants and the continued risk of infection dampen prospects for economic recovery,” the BSP said.

But there might be some signs that demand for credit is on the mend. Month-on-month, bank lending increased 0.4% in May, and analysts like Ruben Carlo Asuncion, chief economist at Union Bank of the Philippines, are expecting the on-year contraction to further ease from there.

“I believe that perception about the economy’s recovery prospects has begun to improve and it is now obvious with appetite for financing,” Asuncion said in a text message. “With more easing of restrictions due to better supply levels of vaccines, we may see more uptick of this particular metric,” he added.

Breaking down the BSP’s report, consumer loans fell 9.2% year-on-year in May as motor vehicle loans and salary-based loans continued to decline. But the decline was milder compared to 10.2% drop in April.

Loans extended for production activities of various businesses also pared their decline to an annualized rate of 2.9% in May compared to 3.8% decrease in the preceding month.

“Looking ahead, the BSP shall sustain monetary policy support in order for the economic recovery to gain more traction. In ensuring a favorable financing environment, the BSP will remain vigilant against emerging risks to inflation and economic growth, consistent with its price and financial stability mandates,” the central bank said.