Measuring the economic outlook based on growing credit demand
Credit activity is one of the most effective barometers of a nation’s economic health. A robust financing landscape not only helps meet individual needs such as personal loans and mortgages, but also enables and encourages entrepreneurship and creates greater social mobility among the population, which in turn leads to economic growth.
Most importantly, strong credit activity signals confidence and optimism in the current economy, as many people tend to only borrow money that they believe they can repay in the near future.
The importance of credit cannot be underestimated as the country begins its long recovery following the events of the COVID-19 pandemic. Luckily things are looking rosy.
The Bangko Sentral ng Pilipinas (BSP) recently announced that the Philippines’ universal and commercial banks, which primarily power the country’s financial system, have continued to grow due to improving economic conditions and a surge in borrowing activity.
“Key performance indicators showed steady increases in assets, loans and deposits, and continued profitability with ample loan loss reserves, ample liquidity and capital buffers,” said BSP Gov. Benjamin E. Diokno.
“The industry remains the driving force of the Philippine banking system as it holds the lion’s share of the system’s lending at 93.6%, investment at 96.3% and deposit-taking activity at 94.1% at the end of April 2022,” he added.
Major banks saw their net profit grow 26.7% year-on-year to 61.4 billion pesos in March 2022, with their assets registering an 8.2% increase to 19.45 trillion pesos at the end of April, compared to 17.98 trillion Pesos posted a year ago. This was mainly due to deposits, which increased by 8.7% to 15.18 trillion pesos over the same period.
Banks’ total loan portfolio, which spans real estate, wholesale, retail and manufacturing sectors of the economy, grew 9.8% year-on-year to 10.7 trillion pesos at the end of April. Meanwhile, loans to micro, small and medium-sized enterprises (MSMEs) totaled 334.8 billion pesos in April, while loans to households, including residential real estate, reached 1.7 trillion pesos.
“With a solid and strong performance, U/KBs provided credit support to the main segments of the economy,” said Mr. Diokno.
Consumer credit posted positive growth for the first time in a year, rising 0.7% year-on-year to 1.97 trillion pesos at the end of March after declining for four straight quarters in 2021. This was mainly due to home loans, which accounted for 44.6% of consumer lending in March. Credit card receivables follow with 22.7% and car loans with 22.6%.
“Most of this growth came from residential mortgage lending, credit card receivables and salary-based general purpose consumer lending. These outpaced declines in auto loans and other consumer loans,” Mr. Diokno said.
“The improved outlook is due to the expectation of the availability of more jobs and tenure, supplemental and high income, and effective government policies and programs such as easing quarantine restrictions, availability and rollout of vaccines, and provision of financial support,” he added.
The BSP expects growth in both business and consumer credit to continue for some time. The latest survey of senior bank loan officers released by the central bank showed that half of the banks surveyed see increasing demand for corporate loans at least until the end of the first half of 2022.
Assuming the country’s economic outlook continues to improve, lenders are optimistic that business loans will continue to grow as financing needs for inventories and receivables increase. Higher consumption in the second quarter is expected to boost private customer borrowing alongside more attractive financing offers from banks, lower interest rates and higher housing investments.
In addition, the banks surveyed said that in addition to a net easing in credit standards for home loans, they also expect an increase in demand for home loans in the April-June period. This is being helped by improving borrower profiles, more optimistic economic growth prospects and increased risk tolerance, lenders said.
Bake a “bigger cake”.
Nevertheless, there is still a large part of the Philippine market that is not yet or only insufficiently served by banks. According to a study by information solutions company TransUnion Philippines, which surveyed 1,008 unaided and 964 underserved consumers in the Philippines, including responses from 11,128 adults, half of unaided (51%) and underserved (52%) Filipino consumers anticipate their need for credit in the next three increase to five years.
It is the banks responsibility to develop and offer more affordable products to meet this need.
“There is considerable market potential. Many of our providers are now in recovery mode and looking to grow. But again, we need to increase the size of the pie. And how do you enlarge the cake? It’s about tapping into the unserved and underserved market,” said Pia L. Arellano, TransUnion Philippines’ regional president and chief executive officer.
TransUnion’s study, produced in partnership with Qualtrics Research Services and titled “Empowering Credit Inclusion: A Deeper Perspective on Credit Underserved and Unserved Consumers,” found that unbanked and unbanked people, despite lacking credit experience, understand the benefits and risks of a Borrowing understand recognition.
The study found that 32% of underserved consumers in the Philippines would borrow more if they could make lower weekly or monthly payments. The desire not to incur debt was cited as a reason for not taking out any or more borrowing by 53% of unserved and 52% of underserved consumers, while around 40% of underserved consumers also cited a concern about being in control of their debt losing finances.
“This means a majority of consumers want more access to credit and want to use credit for their financial needs,” TransUnion said. — Bjorn Biel M. Beltran