Measuring economic prospects through the growing demand for credit

Credit activity is one of the most effective barometers of the economic health of a nation. Not only does a robust financing landscape helps meet individual needs like personal loans and mortgages, it also enables and promotes entrepreneurship, creating greater social mobility among the populace, which in turn results in economic growth.

Most importantly, strong credit activity signifies confidence and optimism in the current economy, as many people tend to only borrow money that they believe they can pay back in the near future.

The significance of credit cannot be understated, especially as the country begins its long recovery after the events of the COVID-19 pandemic. Fortunately, things are looking rosy.

The Bangko Sentral ng Pilipinas (BSP) recently revealed that Philippine universal and commercial banks, which primarily drive the country’s financial system, continued to grow on the back of improving economic conditions and a ramp-up of credit activity.

“Key performance indicators showed a steady rise in assets, loans, and deposits, and sustained profitability with ample credit loss reserves, sufficient liquidity and capital buffers,” BSP Governor Benjamin E. Diokno said.

“The industry remains the prime mover of the Philippine banking system as it holds the lion’s share of the system’s lending at 93.6%, investing at 96.3%, and deposit-taking activities at 94.1% as of end-April 2022,” he added.

Big banks recorded a 26.7% year-on-year growth in their net profit to P61.4 billion as of March 2022, with their assets seeing an 8.2% rise to P19.45 trillion at end-April compared with the P17.98 trillion posted a year earlier. This was mainly driven by deposits, which increased by 8.7% to P15.18 trillion in the same period.

The total loan portfolio of the banks, extended to real estate, wholesale and retail trade, and manufacturing sectors of the economy, grew by 9.8% year on year to P10.7 trillion at end-April. Meanwhile, loans to micro, small and medium enterprises (MSMEs) were recorded at P334.8 billion as of April, while lending to households, including residential real estate, reached P1.7 trillion.

“With a solid and strong performance, U/KBs provided credit support to the main segments of the economy,” Mr. Diokno said.

Consumer loans saw positive growth for the first time in a year, rising 0.7% year on year to P1.97 trillion at end-March following four consecutive quarters of contraction in 2021. This was mainly driven by residential real estate loans, accounting for 44.6% of consumer loans in March. This was followed by credit card receivables at 22.7% and motor vehicle loans at 22.6%.

“This growth came largely from residential real estate loans, credit card receivables, and salary-based general-purpose consumption loans. These outpaced the declines in motor vehicle loans and other consumer loans,” Mr. Diokno said.

“The improved outlook is due to expectations of availability of more jobs and permanent employment, additional and high income, and effective government policies and programs, such as the easing of quarantine restrictions, availability and rollout of vaccines, and provision of financial assistance,” he added.

The BSP expects the surge in both business and consumer loans to persist for quite some time yet. The latest Senior Bank Loan Officers’ Survey released by the central bank showed half of respondent banks see growing demand for business loans at least until the end of the first half of 2022.

Provided that the country’s economic outlook continues to improve, lenders are optimistic that business loans will see further growth, as inventory and accounts receivable financing needs arise. Higher consumption is also expected to boost retail borrowings in the second quarter, alongside more attractive financing offerings by banks, lower interest rates, and higher housing investments.

Furthermore, for the April to June period, bank respondents said they also anticipate an increase in housing loan demand, alongside net easing in credit standards for housing loans. This will be backed by the improvement in borrowers’ profiles, more optimistic economic growth outlook, and increased risk tolerance, lenders said.

Making a ‘bigger pie’

Yet, there is still much of the Filipino market yet unserved or underserved by banks. According to a study conducted by information solutions firm TransUnion Philippines, which surveyed 1,008 unserved and 964 underserved consumers in the Philippines including responses from 11,128 adults, as much as half of unserved (51%) and underserved (52%) Filipino consumers expect their need for credit to increase in the next three to five years.

The onus is on the banks to develop and provide more affordable products to meet such needs.

“There’s a sizable market potential. A lot of our vendors are now in recovery mode and they do want to grow. But again, we have to increase the size of the pie. And how do you increase the size of the pie? It’s by tapping the unserved and underserved market,” TransUnion Philippines Regional President and Chief Executive Officer Pia L. Arellano said.

TransUnion’s study, made in partnership with Qualtrics Research Services, and titled “Empowering Credit Inclusion: A Deeper Perspective on Credit Underserved and Unserved Consumers”, found that despite a lack of credit experience, the unbanked and underbanked understand the benefits and risks of taking on credit.

The study found that 32% of underserved consumers in the Philippines would take on more credit if they can make lower weekly or monthly payments. Not wanting to incur debt was cited by 53% of unserved and 52% of underserved consumers as the reason they don’t take on more or any credit, while some 40% of underserved consumers also cited their concern over losing control of their finances.

“This implies that a majority of consumers are looking to gain more access to credit and leverage credit for their financial needs,” TransUnion said. — Bjorn Biel M. Beltran

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