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: Amidst the consternation about Indian banks’ seeming reluctance to reduce their lending rates and the consequent moral suasion to induce them to do so, it might be useful to take a look at bank lending in the US, an economy that has been both the storm centre of the current crisis and the crucible of some of the most innovative, aggressive and sustained policy responses. Have banks in the US responded to these unprecedented global policy interventions by easing credit flows, especially to non-financial borrowers? Note that easing credit entails not just lowering lending rates but also relaxing credit standards.
A Federal Reserve Board survey of loan officers released Monday, showed quite conclusively that bankers in the US are maintaining a tight leash on lending. Lending standards are the tightest on record. The (periodic) survey of 55 senior loan officers at banks in the US found no institution was willing to ease standards on commercial real estate, commercial and industrial (C&I), and most residential loans.
The C&I segment is important, since this is lending to the “real” sector, as distinct from lending to the financial sector. 95 percent of the bankers said they stiffened standards for C&I loans to large and middle-market firms by raising the cost of credit lines. Nearly two-thirds of the respondents said they were containing C&I lending because of negative expectations of the economy. 87 percent said they were charging higher premiums on riskier loans. Only 12 percent said they were tightening because of concerns about their own liquidity position. In other words, lending decisions are not solely based on the liquidity situation.
Of particular importance, in response to a special question the Fed tacked on to the survey, more than 47 percent said the dollar amount of outstanding C&I loans drawn under preexisting commitments increased. Almost three-quarters of those finding higher demand attributed the rise to borrowing that shifted to their bank from other institutions “because these other sources became less attractive”.
And 87 percent of the bankers said they tightened credit standards for applicants seeking commercial real estate loans. Only 2 percent said they had eased credit standards on prime borrowers. The story was much the same for several other types of loans. For credit cards, many bankers said their decision had little to do with a cardholder’s financial health; only 27 percent of the respondents who cut limits cited a declining credit score....
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