Credit conditions may be easing a bit, according to the July Federal Reserve Senior Loan Office Opinion Survey on Bank Lending Practices. While nearly 80% of loan officer respondents said that standards for firms with sales of at least $50 million remained unchanged over the past three months, almost 20% said they had eased. When it came to applications from smaller firms, standards eased at 10% of banks, and remained unchanged at the rest.
Similarly, the maximum size and maturity of credit lines for large and mid-market firms eased at about 17% and 12.5%, respectively, of banks. The change in the cost of credit was even more pronounced: It eased at about 45% of banks.
The trend was similar, although not quite as dramatic, when it came to smaller business applicants. The size, maturity and cost of credit either remained the same or eased within all the banks participating in the survey. For instance, the cost of credit for smaller businesses dropped at more than one-third of the banks.
What’s behind the shift in the banks’ behavior? Competition from other banks and financial institutions was key, according to respondents; 95% said this was somewhat or very important. Slightly more than half – 51% – of respondents said a more favorable, or at least more certain, economic outlook was somewhat important. An increased tolerance for risk was somewhat important to about one-quarter of respondents.
Banks’ decisions to ease credit appears to have coincided with a jump in loan demand. Demand from mid-market and larger firms was moderately stronger at about 28% of banks, while demand from small firms was up at about one-third. Driving the jump in demand were increases in clients’ needs for inventory and accounts receivable financing, as well as greater client investment in plant and equipment.
While the Fed survey offers business execs a reason for optimism, the signs aren’t universally positive. The total value of business loans of up to $1 million, at $588 billion, was lower in 2012 than it had been in any of the preceding five years, according to an SBA report, “Small Business Lending in the United States, 2012.”
That said, one can find a bit of good news even here: The rate at which small business borrowing is declining has itself declined, dropping from 6.9% in June 2011 to 3.1% in June 2012. “This smaller drop in the value of small business loans suggests that although small business lending terms and standards are easing, standards remain fairly high,” the report notes.
In addition, the number of commercial and industrial loans of $100,000 or less increased between 2011 and 2012, rising from 18.9 million to 21.3 million. The number of larger loans dropped slightly.