Banks, faced with low business growth and fierce competition in the industry, are offering business loans with sweeter terms, which is worrying some regulators.
The Wall Street Journal, citing an analysis of lending data, reported that lenders are providing corporate borrowers with lower interest rates and terms that aren’t as strict, even if the company is in an industry that is struggling. While the increased access to loans is good for business borrowers while the economy is doing well, regulators are worried that with rising interest rates, the borrowers may not be able to pay back the loans.
The WSJ pointed to a report from The Office of the Comptroller of the Currency (OCC), which referred to an easing of commercial loan standards as a leading risk to the industry. While the number of bad business loans is low and banks aren’t taking on crazy lending risk, the OCC said that in the past year, it has privately warned financial companies to modify their lending practices for businesses.
“The worst loans are often made in the best of times,” Comptroller of the Currency Joseph Otting warned in the report.
According to the OCC, in an effort to drive profits, banks are trying to lure business borrowers by offering longer interest-only periods, relaxing loan covenants meant to protect from losses and lowering rates over their cost of funds. As a result, commercial loan growth was at an annual rate of 3 percent as of the middle of May.
That doesn’t mean the regulators aren’t stepping in. The report noted that the number of Matters Requiring Attention (MRAs), which are citations the OCC issues in order to modify banks’ practices, has increased 24 percent from the first quarter of last year to the first quarter of this year. The regulator wouldn’t say which banks received the citations.
The report noted that banks aren’t going after riskier borrowers, but are stepping up their efforts to land more of those business loans that they deem to be safe. Some of those include retail and energy, both industries banks have shied away from in the recent past.