Banks further tighten rules on property loans

MANILA, Philippines - Banks continued to tighten the lending standards for commercial real estate loans in the third quarter or a year after the Bangko Sentral ng Pilipinas (BSP) introduced stricter rules on bank’s real estate exposure.

Dennis Lapid, deputy director of the BSP’s Department of Economic Research, said results of the third quarter 2015 Senior Bank Loan Officers’ Survey showed a net tightening of overall credit standards for commercial real estate loans for the 13th consecutive quarter.

Lapid explained respondent banks attributed the net tightening of overall credit standards for commercial real estate loans to perceived stricter oversight of real estate exposure of banks by the central bank.

“In particular, respondent banks reported stricter collateral requirements and loan covenants along with wider loan margins, reduced credit line sizes, shorter loan maturities, and increased use of interest rate floors for commercial real estate loans,” he said.

The survey showed about 86.4 percent of respondent banks indicated unchanged overall credit standards for commercial real estate loans using the modal approach.

However, based on the diffusion index approach, a net tightening of overall credit standards was noted for commercial real estate loans in the third quarter.

For the next quarter, Lapid said most of the respondent banks expect to maintain their credit standards for commercial real estate loans.

In the survey, a number of banks indicated increased demand for commercial real estate loans on the back of clients’ improved economic outlook and increased customer investment in plant or equipment.

Although most of the respondent banks anticipate generally steady loan demand, a number of banks expect demand for commercial real estate loans to continue increasing in the fourth quarter.

BSP Governor Amando Tetangco Jr. earlier said there are no macro-prudential risks stemming from the real estate market as the growth in the property sector continued to be demand driven and banks have learned their lessons during the Asian financial crisis in 1997.

The BSP stepped up its watch over the real estate sector as early as 2012 by ordering banks to disclose more comprehensive reports on their exposures to property industry.

The pre-emptive macroprudential policy measure approved by the Monetary Board required stress tests for banks to determine if their capital will be enough to absorb credit risk that may arise from their exposure to the property sector.

The BSP explained that universal, commercial, and thrift banks would need to meet a capital adequacy ratio of 10 percent of their qualifying capital following the stress test results.