Are banks ratcheting up commercial lending, finally?

Though the latest commercial-loan data is open to interpretation, one sign suggests such money is starting to flow. Bankers are requesting more credit checks on commercial borrowers than they have in recent quarters, leaving observers to consider whether this portends an eventual rise in lending.

Banks are on pace to increase such requests by 5% to 10% this quarter, compared to a year earlier, according to PayNet Inc., a Skokie, Ill., company that collects and analyzes payment history data.

To optimists, the forecast means that banks are taking the steps and doing the stringent due diligence required before they scale up lending. An opposite camp views the moves as stemming more from a possible surge in applications by cash-strapped borrowers and indicating anew that banks are tightening their belts amid a prolonged economic slump.

Both sides agree, however, that the data shows banks are being more cautious about lending as they try to reduce the likelihood of further defaults and credit losses.

William Phelan, PayNet's president, said he views the data as a clue that credit markets are starting to thaw. "The banks are getting back to the fundamentals of lending, and they want to have the footing in place," he said.

"I think we are going to trend up from here," Phelan added. "If they weren't doing any credit checks, we would see it as an indicator that they wouldn't be making any loans."

Skeptics contend, however, that with commercial loan demand still slack financial firms are unlikely to significantly step up lending anytime soon. Among the signs that highlight this flagging need for credit: reduced acquisitions among commercial companies, rising inventories and a decrease in equipment investment.

Jeff Davis, the director of research at Howe Barnes Hoefer & Arnett, questioned whether lending is truly on the rise. Though he believes commercial and industrial lending may rise marginally this quarter, he said, the lion's share of loan applications is probably coming from the most strained businesses. "That would require more credit checks," as well, he said.

"The name of the game for most healthy businesses right now is deleveraging," Davis said.

Peter Hooper, the chief economist at Deutsche Bank AG's Deutsche Banc Securities Inc., said he could see an uptick in credit checks as a "helpful sign" of heightened lending activity.

"But it is really too soon to tell," he added. "We really need to see more supportive data to know if banks are opening up to more clients or tightening up further."

Bankers have been reluctant to say precisely how much credit is available to commercial borrowers. Notably, chief executives such as James Dimon at JPMorgan Chase & Co. and Kenneth D. Lewis at Bank of America Corp. have underlined that their banks are open for business — when it makes financial sense. Still, they have expressed caution about aggressively revving up lending.

"Lending volume is not what it was — and it shouldn't be," Lewis wrote in a March 9 letter to investors. "We're in a recession, which means that demand for credit is lower, and credit standards are tighter. But that doesn't mean 'banks aren't lending.' In fact, we're out there in the marketplace making every good loan we can, growing our relationships with existing customers and creating new ones."

Phelan said a review of PayNet's 14 million commercial contracts shows banks are still "shouldering the load" in financing small businesses, middle-market companies and large firms. Though overall commercial lending fell 24% last year, from 2007, bank lending to companies was off only 11%. By comparison, captive finance companies and independent lenders saw decreases of 28% and 44%, respectively. In 2008 banks financed 51% of all commercial loans, up from 43% a year earlier.

"Our economy would have been in a much more severe recession had the banks completely turned off the spigot," Phelan said.

The American Bankers Association has forecast an 8% increase, overall, in commercial and industrial lending this year compared to 2008, and it called the rise in credit checks a positive for the industry regardless of why banks are stepping up the screenings.

"At least it shows more stable and responsible lending," said Keith Leggett, the ABA's senior economist.

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