Credit tightening – a sign of the times?
For a society that runs largely on credit, when loans start drying up, the wheels of commerce grind to a shuddering halt.
In a survey recently conducted by the Federal Reserve, signs are emerging that lines of credit are being increasingly squeezed, with loans to businesses on commercial and industrial (C&I) and commercial real estate (CRE) being subject to tougher standards over the second quarter of 2016 than in the past three quarters.
Businesses looking for C&I loans to buy new equipment or relocate are finding it harder to access the credit they need as banks continue to tighten their criteria for lending, especially for medium- and large-sized companies.
An uncertain outlook impacts lending criteria
Banks tighten or relax standards in response to two factors: prevailing economic conditions; and the level of competition from other lenders in the market. When the economy is riding high and competition for business is fierce, lending criteria relax. But if, as is the case at 2016’s mid-point, the economic outlook is uncertain, banks – and non-bank lenders – become more risk averse, regardless of whether commercial competition is aggressive.
In a release accompanying the survey, The Federal Reserve explained: ‘Most domestic respondents that reportedly tightened either standards or terms on C&I loans over the past three months cited as important reasons a less favorable or more uncertain economic outlook, worsening of industry-specific problems, and reduced tolerance for risk.’
Credit crunch suppressing growth
The trend is problematic because as access to credit is reduced, so businesses cut back on spending, hiring and expanding – all of which are essential to kick-starting economic growth on a wider scale. It’s easy to see, therefore, how a tightening credit market prefaces a sluggish economy and increases fiscal uncertainty. Not that credit contraction in itself will automatically signpost a broader economic downturn but it does reflect confidence levels.
Bank of Cardiff Managing Director Dean Lyulkin comments: ‘Large bank participation in small business lending is an area we expected to improve dramatically when the economy and employment started to recover from the financial crisis a few years ago. Not only has that not proven to be the case but statistics show the situation may even be getting worse.’
Banks lending only with caution
It’s fair to say that the credit squeeze is taking place against a backdrop of narrow net interest margins for banks – a result of the Fed’s continued policy of low interest rates and forecast for only modest rises in the coming months. Bigger banks are now also required to hold more capital against loans under reforms ushered in following the financial crisis. All of which has prompted a more cautious outlook for lending.
According to the National Federation of Independent Business’s monthly survey, small businesses are getting short shrift when applying for loans; in the first half of this year, 4.2% of small businesses said their borrowing needs weren’t satisfied – up from 3.1% during the last half of 2015.
It’s leaving business owners frustrated, with revenues stuck in the doldrums as the credit bottleneck stifles expansion across the board. It remains to be seen whether economic developments at home and abroad will loosen banks’ lending policies in the coming quarter – or simply result in an even tighter squeeze on available funds.
Exploring alternative lending options
It’s not all bad news, as the bank squeeze is opening up opportunities for alternative lenders to fill the gap left by the big banks’ failure to meet small business customers’ needs.
‘We continue to grow our loan originations year after year as small business owners have a healthy appetite for credit and delinquencies are stable,’ explains Bank of Cardiff’s Lyulkin. ‘Competition dictates ever-improving terms on working capital loans and equipment financing. Our business customers have more borrowing options than ever reaching them via both traditional and digital marketing channels from a variety of non-bank and FinTech lenders.’