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State of SBA loans: The demand for some commercial loans is declining

State of SBA loans: The demand for some commercial loans is declining

Last month, the American Banker Index of Banking Activity dropped to its lowest level since January 2014. The reading, which signals the state of banking activity, indicates that the banking sector is displaying signs of sluggishness. This article discusses the potential reasons for the notable decrease observed in the index of banking activity.

Lower demand for commercial loans

As you might know, the demand for commercial loans is one of the most influential variables in the calculation of the index. In other words, a decrease in commercial loan reading will translate into a comparable drop in the banking activity index. The index for commercial loan application fell to 49.7 in November 2014, which represents an all-time low for this metric that was introduced in May 2012.

Why is the demand for commercial loans weakening?

There has been a lot of speculations in the banking industry about what is causing the progressive decline of the demand for commercial loans. Suggested factors include:

–        Falling oil prices

–        Preparation of the 2015 budget

–        Low credit scores

No one knows for sure whether the drop in oil prices is affecting the number of commercial loan applications, and if yes to which extent. But industry bankers are hoping that if oil prices keep on falling, consumers might be encouraged to take out loans and spend more. A more plausible explanation for the poor state of SBA loans is the fact that many companies are still calculating their budget for 2015. Until they have determined how much money they’re going to need to operate this year, they will hold back on commercial loans. Finally, applicants’ low credit scores are another reason there have been fewer commercial loan applications.

There are many bankers across the sector who are optimistic that the index of banking activity will improve over the next few months. Only time will tell whether they are right.

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