Loan demand on the rise, credit standards continue to ease, loan officer survey says

By Sara Rosenberg

New York, Feb. 3 - Demand for commercial and industrial bank loans has increased and credit standards as well as loan terms have eased over the past three months, according to the Federal Reserve Board's January senior loan officer opinion survey on bank lending practices.

More than 20% of domestic banks reported increased demand for commercial and industrial loans from small firms, and 11% reported stronger demand from large and middle-market firms. By comparison, in the October survey, 4% of domestic banks indicated weaker loan demand from small firms, and 12% reported weaker demand from large and middle-market borrowers.

There was also a rise in the amount of inquiries from potential business borrowers. Of those surveyed, 36% of domestic institutions reported an increase in the number of inquiries, up from 18% in October and 10% in August.

The most important reasons for this strengthening in demand, according to domestic respondents, were increased customer investment in plant and equipment and increased customer needs to finance accounts receivable and inventories, the survey said.

Of the domestic banks that experienced a decline in demand, about two-thirds indicated that it was due in part to an increase in their customers' internally generated funds, and two-thirds also attributed the decline in part to a shift in their customers' borrowing to another bank or a nonbank credit source, the survey added.

As for lending standards and terms, 18% of domestic banks reported that they had eased their lending standards for large and middle-market firms over the past three months, the largest reported net easing since the second half of 1993. And, 11% of domestic banks indicated that they had eased standards on loans for small firms.

Commercial banks ease terms

Commercial banks also reported easing a number of terms. About 25% of domestic banks indicated that they had narrowed the spreads of loan rates over their cost of funds for large and middle-market borrowers, up from 14% in the October survey. Domestic banks also continued to trim spreads on business loans for small borrowers.

Furthermore, for the first time since the fourth quarter of 1998, when the survey began collecting information on risk premiums, domestic banks reported no net tightening of premiums charged on riskier loans to large and middle-market firms.

Lastly, domestic and foreign institutions continued to report an easing of terms on credit lines, including increasing their maximum sizes and lowering their costs, the survey said.

More-aggressive competition from other banks and nonbanks, and an improvement in the economic outlook were the most important reasons behind the decisions to ease credit standards and terms, according to survey respondents.

About 80% of the domestic banks that reported an easing of standards or terms cited more-aggressive competition as a reason for doing so, and 36% of domestic respondents indicated that this was a very important reason. About 75% of the domestic institutions that eased their lending policies pointed to a more favorable economic outlook.

Among these domestic institutions that reported a tightening of standards and terms, a reduced tolerance for risk was the most frequently cited reason for having done so, the survey added.

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