Credit conditions for large corporations tighten as unsecured loans interest rates went up

Credit conditions for large corporations tighten as unsecured loans interest rates went up

Medium-sized businesses remain unchanged

BY DURRANT PATE
Observer business writer

Sunday, August 09, 2020

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The Intelligence Gathering Unit of the Bank of Jamaica (BOJ) is reporting that lending conditions faced by large firms tightened in the March 2020 quarter, relative to the previous December 2019 quarter.

In its latest Quarterly Credit Conditions Survey, the BOJ Intelligence Gathering Unit reports that the Credit Conditions Index (CCI) for large firms suffered a slight decline moving to 99.5 for the quarter relative to the CCI of 100 in the previous quarter. Indices above 100 indicate easing of credit market conditions while indices below 100 indicate tightening of market conditions.

Credit terms applied to secured loans remained unchanged but credit terms applied to unsecured loans tightened. The deterioration in credit conditions applied to unsecured loans associated with higher interest rates.

The March 2020 survey was conducted online between May 6 and 29 among commercial banks, building societies, near-banks, credit unions and development banks.

It is designed to elicit qualitative information on changes in the demand and supply of credit to various types of businesses as well as individuals.

LENDERS PLAN TO TIGHTEN CREDIT FOR JUNE QUARTER

For the June 2020 quarter, lenders reported that they plan to continue to tighten credit conditions applied to both secured and unsecured loans.

This projected tightening would be reflected in higher interest rates and loan covenant on secured and unsecured loans as well as loan monitoring requirements for secured loans.

Credit supply availability to large businesses declined relative to the previous quarter. This was reflected in a Credit Supply Index (CSI) of 93.3 for the quarter, relative to 102.6 in the previous quarter. The CSI reflected notable reductions in credit made available for both local and foreign currency loans.

Less credit was channelled to all industries except for distribution, construction, land development, professional and other service industries. The decline in credit availability reflects changes in lenders' risk appetite, loan portfolio mix and economic outlook of lenders.

REDUCING FOREIGN EXCHANGE CREDIT WHILE INCREASING LOCAL CURRENCY CREDIT

For the June 2020 quarter, lenders plan to increase the availability of local currency credit particularly to the manufacturing, distribution and electricity, gas and water industries. On the other hand, lenders plan to reduce foreign currency credit made available to large businesses, particularly those in the tourism industry given measures imposed by the Government in response to the pandemic.

There was a contraction in demand for credit from large businesses in the March 2020 quarter as indicated by a Credit Demand Index (CDI) of 95.6 compared with 104.5 in the previous quarter. This contraction was reflected in the demand for both local currency and foreign currency loans.

The decline in local currency loans in the review quarter stemmed from all the industries except construction, land development, distribution, professional and other service industries, while the decline in foreign currency loans stemmed from the agriculture and fishing, mining and quarrying, tourism, entertainment, and electricity, gas and water industries.

Lenders highlighted that important factors that influenced credit demand from large businesses were changes in business activities, interest rates and macroeconomic risks, developments in one or more economic industries as well as other factors.

MEDIUM-SIZED BUSINESS LENDING CONDITIONS

Lending conditions faced by medium-sized businesses remained unchanged in the March 2020 quarter, relative to the previous quarter. This was reflected in a CCI of 100.0 for the March quarter. The unchanged credit terms for the March quarter was reflected in both unsecured and secured loans.

For the June 2020 quarter, lenders reported that they plan to tighten credit terms applied to both secured and unsecured loans. Credit Supply Credit made available to medium-sized firms remained unchanged for the March 2020 quarter, relative to the December 2019 quarter.

This was reflected in both local and foreign currency credit and across all industries. For the June 2020 quarter, the CSI for medium-sized businesses is expected to tighten for both secured and unsecured lending.

Credit demand growth for loans by medium-sized firms accelerated slightly in the review quarter. The slight acceleration was for both foreign currency and local currency loans.


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