Emerging Market Bank Lending Slows

Emerging Market Bank Lending Slows

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Since lifting the reserve requirement ceiling and increasing interest rates has not considerably alleviated the problem of inflation, it looks inevitable that emerging economies will take another key measure imposing more control over bank lending to make their tightening monetary policy work. A recent report by the Institute of International Finance (IIF), an association of the worlds major financial institutions, shows the whole lending conditions improvement in emerging markets (EM) has slowed down during the first quarter of 2011, although the demand for loans still stays strong.

The Emerging Bank Lending Conditions Survey uses a diffusion index with 50 as the neutral line to measure the magnitude of five aspects: credit standards, demand for loans, funding conditions, trade finance, and nonperforming loans. In general, the IIF Global EM Bank Lending Conditions Index was 54.9 during the first quarter of the year, showing the conditions in an improving pattern but a slowing down pace, compared to last quarters figure of 58.9.

Among the four regions where the IIF spread questionnaires, Asia showed the second weakest lending conditions with the index standing at 54.1, only better than Africa and the Middle East (53.4) but worse than Europe (55.9) and Latin America (56.1).

Harder to get loans
Tightening credit standards
While global credit standards remain broadly unchanged this quarter, banks in Asia continued to tighten their standards. This move can be generally regarded as a measure to curb the growing housing bubble in the Asian EM market, as the stricter standards were primarily applied to real estate sector. Over 50 percent of respondents said they were giving tightening credit standards to both residential and commercial real estate borrowers, which will likely restrict a number of smaller property developers who have rushed into the market as prices surge.

In China, where high property prices have become one of the major public complaints, the growth in loan issuance to real estate sector has slightly slowed down over the past first quarter, according to a report by Peoples Bank of China. The total lending to the sector increased by RMB510 billion, slowing down by 6.4 percent from a year earlier and 0.9 percent from a quarter earlier.

The tightening credit standards may help reduce the amount of nonperforming loans, which had stood out as one of the major concerns during the loan easing over the past two years. Over the past three months, most emerging markets banks were happy to see that the nonperforming loans had been decreasing. Around 80 percent of banks in Asia reported that they finally saw a decline in the amount nonperforming loans.

Deteriorating funding conditions
Although funding should not become a problem with the abundant cash flow from distinct investment circulating in the EM markets, banks in both Latin America and Asia reported deteriorating funding conditions in the survey. Around 80 percent of Asian banks said local funding conditions have become stricter. However, it is widely perceived that the tightening funding conditions are only a result of more prudent monetary policy, not a lack of cash. Take China as an example, the interbank offered rate in the country has declined to less than 2 percent, showing Chinese banks are still flush with liquidity.

Despite the generally sterner funding conditions, international trade finance still seems to be a favorable choice of banks. Over 70 percent of banks in Asia responded they were more willing to supply trade finance, and 80 percent of them said that demand had increased in the last three months.

Demand for loans increases
While it is more and more difficult to receive loans, demand for loans keeps increasing. Approximately 50 percent of attendants said demand was increasing for all sorts of lending, including commercial and industrial (C&I) loans, real estate loans and consumer loans.

The booming consumer market in EM countries becomes the top drive for growth in demand for loans. Roughly 88 percent of banks in Asia reported demand for consumer loans had increased. In China, among its newly issued RMB755 billion-household loans, around 54.2 percent is issued to consumers.

The prosperous economic growth also led to strong demand for C&I loans in Asia, with around 70 percent respondents saying demand in the field had grown.

However, it seems that its only in Asia where the demand for residential real estate loans dropped, probably due to residency buyers wait-and-see mentality and some residential property developers temporary withdrawal from the relatively less lucrative-seeming market.

Lending conditions in Asia banks are mixed
The survey, compared to IIFs previous ones, expanded the sample size in each region, in order to get more accurate results. As the previous surveys only had three respondents in Asia, the current survey received answers from 10 financial institutions in the region.

The survey found out that a broader sample somewhat contributed to the declining index of lending conditions, and this is particularly true in Asia, where new banks report less favorable conditions.

About the Author:
This article about emerging markets was written for 2point6billion.com. The site is published by Asia Briefing, who specialises in China Business Guides, like their newest Guide to Due Diligence in China.



Article Originally Published On: http://www.articlesnatch.com


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