Tightening of Bank Lending Conditions Continued to Moderate in Emerging Asia

The tightening of bank lending conditions continued to moderate in Emerging Asia, with the index ticking up 1.7pts to 46.9 in the second quarter of 2014, according to the latest Emerging Markets Bank Lending Conditions Survey from the Institute of International Finance.

As a bright spot, loan demand revived after two quarters, with the index jumping 5.7pts to 51.2, led by a notable turnaround in business and real estate loan demand. Meanwhile, the demand for consumer loans expanded further.

The index for funding conditions edged up 1.7pts to 47.1 as international funding conditions eased for the first time since 2013Q1. On the other hand, domestic funding conditions continued to tighten substantially.

While the supply of trade finance increased further, the demand for trade finance stayed on a downward trend, reflecting uneven export recovery in the region.

Emerging Asia banks continued to tighten credit standards substantially across all loan categories, especially compared to other regions, with the index dipping 2.5pts to 41.6. NPLs continued to moderate in 2014Q2 but banks expect NPLs to accelerate in 2014Q3.

Overall lending conditions

Worldwide, bank lending conditions in emerging economies eased in the second quarter of 2014.

“Overall lending conditions in emerging markets eased for the first time since early 2013,” said Charles Collyns, chief economist for the IIF. “This primarily reflects better bank funding conditions, helped by increased risk appetite in financial markets, consistent with our recent portfolio flows tracker.”

The composite index of the IIF’s Survey increased 2 points to 50.2 in 2014Q2. A value above 50 indicates improving lending conditions.

Both domestic and international funding conditions improved after being tightened sharply since 2013Q2 when market became concerned about the path of the Federal Reserve’s exit from quantitative easing.

Many emerging markets are benefiting from a recovery in mature economies which has improved conditions for trade finance.

Nonperforming loans continued to increase, a trend that banks expect to extend into 2014Q3 according to the survey.

The IIF noted that this may explain the continued tightening in credit standards for loans, a trend that has persisted since 2011Q1.

Emerging Europe saw a significant improvement in bank lending conditions while Latin America saw bank lending conditions deteriorate further.

Emerging Asia continued to see the sharpest tightening in bank lending conditions.

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