Lending standards continue to ease; demand continues to pick up, January Loan Survey finds

By Sara Rosenberg

New York, Feb. 8 - Domestic banks continue to ease lending standards and terms on commercial and industrial loans, and many of these banks are seeing an increase in demand for loans from large and middle-market firms, according to the Federal Reserve Board's January Senior Loan Officer Opinion Survey on Bank Lending Practices.

Over the past three months, about 10% of domestic institutions said that they had eased credit standards on commercial and industrial loans to large and middle-market firms, roughly the same net fraction as in the October survey.

Of the eased standards for these large and middle-market firms, about 45% of domestic respondents reported that they had trimmed spreads of loan rates, about 30% indicated that they had reduced the costs of credit lines, one-fourth reported that they had increased the maximum maturity of loans or credit lines and almost one-fifth of respondents indicated that they had eased loan covenants.

For loans to small firms, 7% of domestic respondents said that they had eased their lending standards, with one-third of banks indicating that they had narrowed spreads of loan rates, about one-fifth reducing the cost of credit lines and a similar fraction increasing the maximum maturity of loans or credit lines over the same period.

More aggressive competition from other banks or nonbank lenders was named as a prime reason for eased standards by nearly all the domestic institutions.

A good percentage also cited an increased tolerance for risk and increased liquidity in the secondary market for these loans as reasons for having eased credit standards or terms on commercial and industrial loans.

Turning to demand, 16% of domestic banks reported stronger demand from large and middle-market firms, roughly the same net fraction as in the previous survey, and only 5% of domestic respondents reported an increase in demand from small firms.

Among those that had experienced stronger demand, most cited borrowers' increased needs to finance accounts receivable and mergers and acquisitions.

Substantial fractions of these respondents also pointed to customers' increased needs to finance investment in plants and equipment and in inventories as contributing to the strengthening of business loan demand over the past three months.

Regarding future business, almost one-fifth of domestic respondents indicated that the number of inquiries from potential business borrowers had increased over the previous three months, a somewhat larger net fraction than in the October survey.

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