The Consequences of Tightened Bank Financing on Companies: Credit Formalizations Plunge by 37.4%

Bad times to get into debt also for companies. Banks have tightened the conditions for financing projects in the middle of the rate hike cycle in Europe, which is sinking the concession. In just one month, Credit formalizations for companies have plummeted by 37.4%until falling back to levels from two years ago.

In the month of August, according to the latest data published by the Bank of Spain, loans to non-financial companies reached 19,521 million euros. Or what is the same, almost 12,000 million less than a month before. The concession is suffering from both more restrictive supply and weaker demand due to high prices.

“The demand for credit falls due to high prices and the greater demands of entities

The TEDR rate, which is equivalent to the APR (annual equivalent rate) without including commissions, for new loans to companies already reaches levels not seen since the Bank of Spain compiled these statistics. It stands at 4.94%, even above the official price of money (4.5%). Financing is contracted especially for smaller companies. Credits of up to 250,000 euros plummeted by 26%, reaching a total of 9,607 million formalizations.

Greater collapse than in mortgages

The fall in credit to companies is more pronounced than in financing to buy apartments. New mortgages fall at a monthly rate of 31%, with prices at their highest levels in 2009 (3.84%). To face this unflattering outlook, banks are forced to redesign their strategy and bet on a price war, admit sources close to the entities. In fact, Granting at competitive rates will be prioritized over paying more for deposits.

Banks’ commercial teams work with the expectation that mortgage granting will plummet between 20% and 30% at the end of the year due to the drop in demand, higher prices and the tightening of supply conditions.

Consumer loans also fall

In a context of high rates and still high inflation (the CPI in Spain stood at 3.5% in September), families are using consumer credit. This is precisely the banking business segment that best resists, although the formalizations fall at a rate of 14%.

This type of credit, which is considered the thermometer of the economic situation, is much more expensive because it assumes more risk and is granted more easily than mortgages. It is marketed at an interest rate higher than 8%.

The era of high rates for longer periods of time is increasingly established in the market. The European Central Bank (ECB), which has applied ten consecutive increases since July 2022, rules out the possibility that reductions in the price of money will begin soon, as Luis de Guindos, vice president of the monetary body, warned a few days ago. The crusade against inflation has taken rates to 4.5%, a 22-year high.