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Ups and Downs of the Lending Business : Finance: Where's the crunch? Healthy banks are hunting for new loans, but demand is often low.

September 13, 1993|From Associated Press

NEW YORK — Is the credit crunch dead?

Many bankers would like you to believe they're back in the lending business after the savings and loan crisis, the commercial real estate collapse and the intense government scrutiny that followed, which sent banks into hibernation.

Banks now are extremely profitable compared with their sickly balance sheets a few years ago. But that doesn't mean they're making those profits by lending again and collecting the interest. On the contrary, many banks seem to be having a hard time finding borrowers.

Listen to James Vaughn, a treasurer of an electrical equipment company in Augusta, Ga., or Bob Brocchini, a farmer in California's San Joaquin Valley. They say bankers still are too intrusive, demanding and insensitive.

"I tend to be pretty much self-financed," says Brocchini, who raises almonds, apples, grapes and peppers on 3,000 acres in Ripon, Calif. He's avoided bank loans for years.

Vaughn says he finds bankers even more difficult to deal with now than when they weren't lending any money. "If they could put a mortgage on your last cat or dog, they would get it," he said.

To a large extent, this attitude helps explain the indifference and skepticism many bankers face now when they seek to drum up new loan business.

The irony, says James J. McDermott Jr., a bank industry analyst at Keefe, Bruyette & Woods in New York, is that "banks are in a better position to lend today than what they have been in 30 years."

Consider these figures:

* The American Bankers Assn. estimates the banking industry's profits will total about $20 billion for the first half of 1993. If that pace keeps up, banks will easily eclipse the record $32.2 billion earned in all of 1992. Falling interest rates, which have lowered the banks' own cost of borrowing, is a key reason for the strong profits.

* Banks have plenty of lending power. A recent study by Veribanc Inc., a research firm in Wakefield, Mass., shows 11,000 banks could lend nearly $780 billion without putting themselves at risk.

* Troubled loans continue to decline. Among the 30 largest banks, problem loans and foreclosed properties accounted for 2.29% of total loans in the second quarter, down from 4.58% in 1991, Keefe, Bruyette & Woods said.

Still, that doesn't mean lending has increased significantly. Based on second-quarter bank earnings reports, total loans nationwide are up just 4% from a year earlier and up 1.7% from the first quarter.

Lending also is uneven. While banks in some areas can hardly give money away, lending in the Midwest and South is well above the national average.

Jack Porteous, vice president for economic development at the Topeka, Kan., Chamber of Commerce, says loan demand is strong in his area.

"The big complaint that I hear from small companies is that they can't borrow any money," Porteous says. "It's holding us back."

Wayne R. Huey Jr., an executive vice president at Meridian Bancorp in Reading, Pa., says business is anything but sleepy. "I can tell you there's a lot of competition out there in the small-business lending market," he says.

The mixed evidence on whether banks are lending again shows just how difficult it is to draw general conclusions. The data also reflects how the national economy really is a patchwork of regional economies, with some gaining while others shrink.

The strongest lending gains appear to be in consumer loans. Commercial and industrial loans are another story, down by about $7 billion in late July from year-earlier levels, Federal Reserve figures show.

Reasons abound for sluggish business loan demand. They include a zeal to reduce debt, uncertainty about taxes, health care reform, workers compensation premiums and other expenses that make employers wary about borrowing.

A survey by the National Federation of Independent Business showed 32% of its membership in July classified themselves as regular borrowers, down from 40% in 1989.

"That gives you an indication of how demand has fallen," William Dennis, NFIB senior research fellow, said.

Beneath their avowed zeal to lend again, banks have subtly raised the criteria on credit standards. Companies now must provide clearer business plans, more collateral and, in some cases, must tolerate more scrutiny by bankers of their daily operations.

Huey of Meridian Bancorp says that while loan standards are tighter now than in the late 1980s, they're no different than requirements in the early to mid-1980s. They also reflect the caution that resulted from the savings and loan mess, which revealed some of the sloppiest loan supervision in history.

Another problem for many borrowers is that their old bank lenders just aren't around anymore, which means loan applicants must build relationships from scratch. This is particularly true for real estate developers.

Jon Hayman, president of Hayman Homes in San Francisco, said he has to scrounge up home construction loans from smaller banks located within the project area or from banks with foreign parents.

"It takes three to six months to get approval, which in the past would take one from the old lenders," he said. Credit is extremely difficult to get for land acquisition and development.

All sides of the lending relationship agree there's another explanation for the slow loan growth: Bankers and borrowers are adjusting to a new era in which frugality, not extravagance, is seen as the wiser choice.

"You've changed the psychology of lending in banks," said Kathleen Holmes, who heads the Financial Institutions Center at Wharton School at the University of Pennsylvania.

McDermott supplied the other end of the equation: "There are an awful lot of borrowers who have been traumatized by the 1980s experience and they are committed to paying down their debts."

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