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Businesses' Interest In Loans Falls
-- November 12, 2002

Now that banks are staring down the barrel of increasing non-performing loans, they're beginning to tighten their lending standards. However, the businesses that can meet these new standards aren't really in the market for new loans anyway. And that doesn't bode well for an economic recovery. And that's ironic -- since the lenders cited the poor economic outlook as the primary reason for the tighter standards.

What this tells us is that businesses are going to continue to keep a lid on spending. They aren't looking to open any new offices or factories, begin any new product lines, or hire more workers. In these tough times, businesses are instead looking to cut costs and improve profit margins. Unfortunately, they haven't had much success. And, in the process, they've closed offices and factories and fired thousands of workers, putting a damper on consumer confidence and spending.

Plus, tougher lending standards aren't necessarily good news for banks. Even though it's a good thing banks are trying to reduce their exposure to bad loans, it's already too late. According to a recent report by top bank regulators, risky loans rose 22% to $236 billion for the year ending in June versus a year earlier. Meanwhile, loans classified as substandard, doubtful, or unrecoverable surged 34%. Without new business from their target market, these banks will face weaker and weaker loan portfolios. And that means many more bad loans and write-offs down the road.

related article: Fed Loan Survey Shows Standards Tighten, Demand Falls