The Bangko Sentral ng Pilipinas is expecting the lending activities of local banks to grow by only 10 percent this year. This is sharply lower than the 20 percent growth recorded in 2008.

BSP governor Amando Tetangco attributed this to greater risk aversion by banks as defaults worldwide rise due to the economic downturn. Tetangco said bank lending was already showing initial signs of slowing down, as banks become more cautious about lending to productive activities.

"We're looking at [a growth of] about 10 percent," Tetangco said. "Credit growth is going to continue but at a slower rate."

According to Tetangco, bank lending has continued at a "relatively healthy" pace but the slowdown in the economy would have a negative impact on credit that he said had begun showing signs of tightening.

Tetangco said that the potential weakening of corporate and household balance sheets could lead to the deterioration the quality of banks' loan portfolios.

He added that exporters and beneficiaries of overseas Filipinos were the most vulnerable to the weakening of balance sheets that would directly impact bank lending.

"Individually, local banks have taken logical defensive action by being more cautious in lending and boosting their liquidity levels," Tetangco said. "The risk is that this could result in less credit for productive purposes, which would add to the pressure on the real economy players."

As the global economy slipped into recession, central bank officials said banks have begun to tighten their credit standards and this could limit the effective of monetary policy easing.

The BSP said lending standards have tightened in recent months as banks feared the greater tendency of borrowers to default on their loans. Based on a BSP survey of loan officers over the past three months, the results indicated that majority of banks showed moderately tighter lending standards in terms of collateral requirements and credit screening.

According to the BSP, credit tightening was a natural reaction of banks in times of uncertainty since they wanted to be amply protected from the possibility of default which would ultimately hurt their balance sheets.