Lending standards and terms tighten, demand slows down, April Loan Survey finds

By Sara Rosenberg

New York, May 5 - Domestic institutions further tightened their lending standards and terms on commercial and industrial loans over the past three months and demand for these loans has weakened, according to the Federal Reserve April Senior Loan Officer Opinion Survey on Bank Lending Practices.

For large- and middle-market firms, about 55% of domestic banks, up from about 30%, reported that they had tightened their lending standards over the past three months.

On net, about 70% of banks, up from about 45% percent in the January survey, indicated that they had increased spreads of loan rates over their cost of funds for large- and middle-market firms.

In addition, smaller but significant net fractions of domestic banks reported tightening non-price-related terms on commercial and industrial loans to large- and middle-market firms over the past three months.

As for small firms, about 50% of domestic respondents reported tightening their lending standards on such loans over the survey period, compared with about 30% in the last survey.

On net, about 65% of banks, up from about 40%, also noted that they had increased spreads of loan rates over their cost of funds for small firms.

Furthermore, large net fractions of domestic respondents reported tightening other price-related terms, and smaller fractions tightened non-price-related terms on loans to small firms.

Substantial majorities of domestic and foreign respondents pointed to a less favorable or more uncertain economic outlook and to a worsening of industry-specific problems as reasons for tightening their lending standards and terms over the past three months.

Also, significant majorities of respondents cited their banks' reduced tolerance for risk and decreased liquidity in the secondary market for these loans.

About 35% of domestic banks and 45% of foreign institutions noted that concerns about their banks' current or expected capital position had contributed to more stringent lending policies over the past three months.

On net, about 15% of large domestic banks reported that demand for loans from large- and middle-market firms had increased over the past three months, but a similar net fraction of these banks reported weaker demand from small firms.

In contrast, about 20% of small domestic banks, on net, reported weaker demand for commercial and industrial loans from all types of firms over the past three months, and about 25% of foreign banks, on balance, reported weaker demand for loans over the survey period.

The majority of large domestic banks that reported stronger loan demand from large- and middle-market firms indicated that customer borrowing shifted to their banks from other bank or nonbank sources, as these other sources became less attractive for such borrowers.

Substantial majorities of domestic and foreign institutions that reportedly experienced weaker loan demand over the past three months pointed to a decrease in customers' needs to finance investment in plant and equipment.

Another reason for reduced demand was that customers' needs to finance inventories had declined, and all foreign respondents noted a decrease in customers' needs for merger and acquisition financing.

Regarding future business, about 20% of large domestic banks, on net, reported an increase in the number of inquiries from potential business borrowers over the past three months.

A tiny net fraction of small domestic banks and foreign institutions indicated that inquiries from potential business borrowers had declined during the survey period.

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