Demand for commercial and industrial loans eases, loan survey finds

New York, May 14 - Demand for commercial and industrial loans was weaker while lending standards and terms were mixed, with some easing, according to the Federal Reserve's April senior loan officer opinions survey on bank lending practices.

Banks reported "mixed changes" in lending standards and terms over the past three months and somewhat weaker demand for most loan types, the research found.

Domestic and foreign institutions indicated that they had relaxed some terms on commercial and industrial loans over the past three months but that they had made few changes in credit standards.

Domestic banks reported that they had tightened credit standards on commercial real estate loans in the three months.

Demand for both commercial and industrial and commercial real estate loans at domestic banks was weaker but foreign institutions reported no change.

In total, 53 domestic banks and 20 foreign institutions responded.

Commercial and industrial loans to large and middle-market firms were little changed since the previous survey in January, domestic institutions told the Federal Reserve.

But terms for these loans were eased further.

About half of the banks - a slightly larger fraction than in January - said they had trimmed interest rate spreads over the previous three months, and smaller fractions reported that they had reduced the costs of credit lines and eased loan covenants.

As in the past few surveys, U.S. branches and agencies of foreign banks reported that their standards on commercial and industrial loans were essentially unchanged. However, a notable percentage said they had eased loan covenants and increased the maximum size of credit lines.

Three quarters of the domestic banks and all foreign banks that reported easing lending standards and terms gave more aggressive competition from other banks or non-bank lenders as the most important reason. "Considerable fractions" of domestic and foreign institutions also cited increased liquidity in the secondary market as a reason for less stringent business lending policies.

About one-fifth of domestic respondents had experienced weaker demand for commercial and industrial loans from large and middle-market firms and from small firms.

Domestic banks attributed the softening to borrowers' increased use of internally generated funds and decreased needs to finance investment in plant or equipment, as well as to a shift in customer borrowing to another bank or to non-bank sources of credit. Foreign banks reported unchanged demand.

About 10% percent of U.S. banks replying to the survey, slightly more than in January, reported that the number of inquiries from potential business borrowers had decreased over the previous three months. By contrast, foreign banks indicated that the number of inquiries from potential business borrowers was unchanged.

Credit standards on commercial and industrial loans to small firms were about unchanged, the survey found. Still, about one-third of the domestic banks trimmed spreads on loan rates and a smaller proportion reported reducing the cost of credit lines and cutting premiums charged on riskier loans.

About one-third of domestic institutions - a "somewhat larger" fraction than in the previous survey - tightened lending standards on commercial real estate loans over the past three months.

As in January, 35% of domestic banks had experienced weaker demand for commercial real estate loans. But the "vast majority" of foreign respondents reported that lending standards on commercial real estate loans had remained basically unchanged.

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