Demand for bank loans continues to dip, says October Loan Survey

By Sara Rosenberg

New York, Nov. 12 - Demand for commercial and industrial loans has dropped over the last three months due to a decline in needs for loans to finance capital expenditures, mergers and acquisitions, inventories and accounts receivables, according to the Federal Reserve Board's October 2002 Senior Loan Officer Opinion Survey on Bank Lending Practices. Furthermore, reductions in this year's loans were attributed to reduced demand from creditworthy borrowers.

The net percentage of domestic banks that reported weaker demand for commercial and industrial loans from large and middle-market firms was 53%, up from about 45% in August. The net fraction of banks that reported weaker demand from small firms also edged up to about 48%.

"All but one domestic bank that experienced weaker demand reported that a decline in customers' need for bank loans to finance capital expenditures was at least a somewhat important reason for the weakness in demand, and almost one-half of these respondents chose this reason as 'very important'," the survey said. In addition, weaker demand for loans to finance mergers and acquisitions, inventories, and accounts receivable was also reported.

Results also indicated further tightening of standards and terms for commercial and industrial loans. Tightening of standards on loans to large and middle-market firms declined in the last three months compared to the August survey, but increased on loans to small firms. Stricter loan terms for middle- market firms decreased but increased for small firms.

The net percentage of domestic banks that reported tightened standards on commercial and industrial loans to large and middle-market firms was 20%, compared to 22% in the August survey. The percentage of domestic banks that tightened standards on loans to small firms was almost 20%, compared to 6%.

The percentage of domestic banks that raised premiums charged on riskier loans to middle-market firms was 40% in the October survey, compared to 50% in the August survey, while the fraction of banks that reported doing so on loans to small firms increased from one-fifth to more than one-third between the two surveys. Almost 30% indicated that they imposed stricter collateralization requirements on small firms, up 16% from the August survey, while tightened collateralization requirements to large firms declined to 24% from around 30%.

More than 80% of domestic and foreign banks that reported tighter standards and/or terms raised concerns over the economic outlook. Domestic banks, once again, pointed to reduced tolerance for risk and increases in corporate bond defaults as a reason behind stricter lending policies.

Lastly, industry specific concerns have eased a bit at domestic banks, with about 39% of respondents citing industry-specific problems as a reason for changed lending practices, compared to 56% in the previous survey.

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