Hotels and restaurants pose greatest risk

They have continued to tighten up their approval standards for both business and consumer loans to prevent creating more nonperforming loans (NPLs).

Demand for loans would not pick up much due to sluggish investment.

About 75 per cent of the financial institutions surveyed consider that liquidity in the banking system was sufficient.

But the government's heavy borrowing to finance its fiscal deficit would suck up liquidity in the system, which would put upward pressure on interest rates while sapping demand for business and consumer loans.

"Demand for housing loans is expected to be close to the first quarter because domestic demand remains low during the economic slowdown," the report said.

Most financial institutions, 83.1 per cent, anticipate that hotels and restaurants would be hard hit this quarter, while 75 per cent believe the electronic and electric appliance industry would suffer and 70.8 per cent predict the auto industry would be laid low by the ailing economy.

Six other industries are also expected to feel the pinch from the global crisis.

The financial institutions forecast demand for business loans to increase slightly this quarter due to low private investment.

Demand for capital to expand operations would not show tangible signs of life while banks continue to batten down their approval standards for all kinds of business loans. They are worried about asset quality and debtors' repayment ability.

The banks' risk perception increased dramatically last quarter from the previous quarter, exacerbated by the economic downturn, glob¬al recession and inhospitable busi¬ness environment.

The financial institutions raised risk premiums for general debtors and highrisk customers, leading to hikes in loan interest rates.

Banks have become more conservative about conditions such as credit line limits and loan covenants, while becoming stricter on quality of collateral for loans to SMEs rather than to large corporations.

Last quarter, demand for business loans fell by more than expected from the previous quarter, due to declines in fixed assets, current assets and inventories in both large corporation and SMEs.

Large corporations reacted to the financial institutions getting tougher with their credit analysis by turning to other channels such as internal funding and debt securities.

The financial institutions look for demand for consumer loans to expand slightly, thanks to the improving economy and the government's stimulus package.

However, they would subtly get stricter on approving consumer loans because they have been concerned about the rise in delinquencies for all kinds of consumer loans.

Last quarter, demand for all kinds of consumer loans dropped more than expected from the previous quarter, due to weak business and consumer confidence.

Falling demand for creditcard loans was caused by fierce competition not just from card issuers but from other sources of funds as well as the rise in credit standards.

Diminishing demand for home loans was blamed on low confidence as consumers have waited for a certain trend in the property market. Some also relied on household savings.

The financial institutions were also cautious on giving out loans due to the economic downturn and escalating credit risk. They were worried about the borrowers' ability to pay debts, particularly mortgage loans.