The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Bank loan approvals fell to their lowest level for six years in the 2020 second half, it was revealed yesterday, with just two-thirds of applicants approved compared to 80 percent in the prior year.

The Central Bank, unveiling its semi-annual commercial bank lending survey, further exposed just how badly borrower demand as well as the industry’s risk appetite has been damaged by the COVID-19 pandemic’s devastating economic fall-out.

John Rolle, its governor, commenting on the report’s findings, said: “The results show that private appetite for credit was sharply scaled back in that period. The number of requests for loans fell by more than half - 58 percent - compared to the year before. Banks also screened applications more carefully, approving only two-thirds of requests.

“In comparison, the year earlier, an average of four out of every five applications were approved. The most common reasons for unsuccessful requests continued to be assessments of already high debt levels or insufficient earnings. Banks also refused applicants who were considered to lack sufficient security or collateral backing for new debts.” Underemployment was cited as another issue.

The report itself, pointing to a “sharply reduced” demand for credit, added: “The number of credit applications fell markedly under the weight of the economic downturn brought on by the novel coronavirus (COVID-19) pandemic. Further, the overall average rate of approval on loan applications decreased to its lowest level since the survey’s inception in 2015.”

While the 11,398 total loan applications received from businesses, households and consumers during the final six months of 2020 represented a 3.8 percent improvement on the first half, they were down by 58.3 percent year-over-year. Of those, some 7,677 or 67.4 percent were approved, while 3,001 requests for credit were denied.

Consumer loan applications continued to dominate the market via an 89.3 percent share, with the largest category of 4,681 - or more than 40 percent of submissions - concerning requests for debt consolidation. Only 2,790 such loans, or just under 60 percent, were approved.

“During the review period, the number of consumer loan applications processed contracted by 60.5 percent to 10,181 vis-à-vis the corresponding period of 2019. Applications were still 6.6 percent higher in comparison with the first half of 2020,” the Central Bank said of 2020’s final six months.

“Declines were registered across most credit components, when compared to the same period of the prior year. The significant movements were noted for credit cards (89.1 percent), travel (84.5 percent), taxis and rented (76.9 percent) and furnishings and appliances (72.9 percent). In contrast, loan requests for commercial vehicle purchases rose sharply.

“Alongside the reduction in the number of applications received, the average approval rate fell by 15.5 percentage points year-on-year to a low of 67 percent in the second half of 2020. With regard to the reduction in approvals, the most common reasons cited by banks were high debt service ratios (47.9 percent), no collateral (29.5 percent) and underemployment (11.3 percent).”

Turning to residential mortgages, the report added that the 702 applications processed represented a 19.6 percent decline year-over-year although a minor increase compared to the 2020 first half. New construction applications jumped by 14.5 percent and 1.6 percent, respectively, compared to late 2019 and the 2020 first half.

“An estimated 54.7 percent of mortgage applications were approved over the latter half of 2020, an increased approval rate of two percentage points relative the same period in 2019,” the Central Bank report said. 

“Specifically, 83.3 percent of new construction projects were approved, while approval rates of 55.9 percent and 25.4 percent were recorded for requested borrowing against existing dwellings and renovations financing requests, respectively.

“The main reason stated for application denials (43.7 percent of instances) was pre-existing debt service ratios in excess of the threshold of 40 percent to 45 percent of income. Justifications also included underemployment (17.2 percent), ‘miscellaneous’ reasons (16.1 percent) - such as low credit scores, lending outside of bank policy and missing information - no down payment (10.3 percent ) and no collateral (6.9 percent).”

On commercial loans, the report said the 511 applications represented a 24.5 percent reduction year-over-year. Yet it added: “Despite the reduction in applications, lending conditions for the commercial component exhibited some improvement during the period, as the approval rate rose by 1.9 percentage points over the previous six-month period, and by 2.7 percentage points over the same period last year, to 92.8 percent.

“The majority of the rejected commercial loan requests (84.2 percent) were due to ‘other’ unclassified reasons, such as, excessive risk, unacceptable overall financial position and inconsistent income. Some denials also factored lack of collateral and prior loan delinquencies.”

Commercial bank industry opinion was split on 2021’s lending outlook, with four institutions expecting the environment to remain unchanged and three predicting it will worsen. None projected an improvement.

Mr Rolle yesterday said non-performing loan levels and credit losses within the commercial banking sector due to the COVID-19 pandemic “are not forecasted to experience the magnitude of write-offs that occurred after the 2008 recession”.

“Already, banks have more than fully provisioned for losses on existing non-performing loans (NPLs), and they hold more than adequate capital for other shortfalls that could materalise. The non-performing loan rate at the end of March was 8.7 percent compared to a decade low of around 8 percent before the pandemic struck,” he added.

“As to the overhang of loans that are still benefiting from deferred payment arrangements, these were only about 7 percent of private sector balances in March compared to just over one-third of total loans earlier on in the pandemic.

“The deferrals highlight the pool of potential borrowers from which new delinquencies are most likely to be estimated. However, as employment is resumed, more of these arrangements are expected to return to payment status.”

Mr Rolle said the Central Bank is forecasting only “marginal expansion in domestic credit” in the short-term, with liquidity set to remain at elevated levels in the banking system.