Despite a widespread opinion that banks aren’t lending, a Federal study says otherwise — that banks are loosening tough credit standards for the first time in four years.
The main reason?
Stiff competition in capturing qualified borrowers.
In July, the Federal Reserve Board surveyed banks throughout the country and found that banks have eased their standards for business loans in the last quarter.
About 20% of the 55 domestic banks surveyed said they had eased standards on commercial and industrial loans for large and middle-market firms. But only 10% reported an easing of loan terms for smaller firms. Foreign banks had basically remained unchanged.
The report said the main reasons for more banks loosening their standards was because of:
“More aggressive competition from other banks or non-bank lenders,” the report read. “A number of domestic banks also pointed to a more favorable or less uncertain economic outlook as an important reason for the change in their lending policies.”
The demand for non-bank lenders and non-traditional loans (like social lending, peer-to-peer lending and cash advances), is growing significantly in the last couple years. Banks are probably looking closely at this trend and concerned about losing some quality borrowers.
With alternatives for business owners, the banks are forced to lower their standards. Now business owners have even more options, and a better chance, to secure capital.
“The financial condition of the financial statements we are seeing from our borrowers is showing that businesses are coming out of the swamp a little bit,” Lori Chillingworth, executive vice president of small-business banking at Zions Bank, told the Salt Lake Tribune on Monday. “We’re able to approve more loans based on that six-month trend. We’re starting to see [optimism] in everyone.”
How do banks lower their standards?
There are several ways:
- Lowering thresholds for credit scores
- Increasing credit limits
- Lengthening maturities
- Charging lower interest payments and fees
- Requiring smaller minimum payments or requiring less collateral
With that said, however, this survey was taken before the European debt crisis and the downgrade of the U.S. debt rating by Standard & Poor’s — developments some analysts say could result in a new tightening of credit.
But we’ll see.
With this news, are you more optimistic about banks lending to your business?