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. More than two-thirds of bankers who lowered credit limits said the uncertain economic outlook played a role; 38 percent who did so cited a ?reduced tolerance for risk.?
To look at US credit growth from a different perspective, we should also refer to a recent research paper from the Minneapolis Fed, ?Facts and Myths about the Financial Crisis of 2008?. Have C&I credit flows really slowed down in line with the attitudes of bankers indicated in the Fed Survey? The authors address four propositions characterising the credit crisis; they then seek to show these are incorrect. Among these supposed myths are that bank lending to non-financial (C&I) entities and individuals had fallen, as had Commercial Paper (CP) issuance by non-financial firms. CP rates have risen to unprecedented levels. They contend, inter alia, that there has not been any significant cutback in bank lending and that CP rates have not really increased significantly.
The paper is probably drawing the wrong conclusions from the available data. As the Federal Reserve Survey points out, bank lending is rising at least in part because past commitments to lend under revolving credit facilities are now getting drawn upon, when corporations are unable to access the CP markets; these are facilities that banks would have committed to years ago but never thought they would ever have to lend to. US credit offtake data indicates, for instance, an increase in lending around the time of Lehman Bros? bankruptcy. As a post in a respected blog notes, a footnote in a Fed release shows that loans by large commercial banks increased in the week ending October 1, solely due to the acquisition of $259 billion in assets from non-bank institutions.
As for CP rates, the authors? conclusion that rates have actually come down says nothing about the volumes related to the CP for that maturity.?eg. 3 month rates may not have moved up, but it may be that only the very highest quality borrowers are issuing 3 month CPs, everybody else might only be able to raise overnight funds.
The point is that banks? lending decisions are complex processes, influenced by multiple factors which impinge on the levels of perceived risk of the environment in which the decisions are taken and not just the prevailing liquidity situation. In spite of the measures that have been announced in the US with sustained escalation over the past year, there is still perceived to be significant residual risk to warrant caution in increasing credit flows.
The author is vice-president, business & economic research, Axis Bank. These are his personal views