Billions of federal bailout dollars are flooding the financial system, credit markets are loosening and many banks say they are ready to lend. But a crucial piece needed to solve the credit crisis is still missing: borrowers.
With the economy slowing, banks are seeing a big decline in the number of people seeking loans because nervous consumers and small businesses are reducing their borrowing.
The slide in loan demand has been a hallmark of past downturns, and it could thwart the government's attempt to increase lending with an injection of $250 billion in emergency cash. This is one problem that has nothing to do with whether a bank is healthy.
“It's not us saying we won't lend money – it's borrowers saying they don't want it,” said William Dunkelberg, chairman of Liberty Bell Bank in Cherry Hill, N.J., which in the past year has seen loan demand cut by about half across its four branches.
In his city of 70,000 people, he said, banks are taking out ads to assure customers that they are financially sound and have money to lend.
“We're letting people know that the credit crunch isn't here. That's a Wall Street problem,” said Dunkelberg, who's also chief economist for the National Federation of Independent Business.
The borrowing drought has been most dramatic among small businesses, which employ half of all private-sector workers.
In fiscal 2008, the number of small business loans issued by banks plunged 30 percent compared with the previous year, according to the U.S. Small Business Administration. Over the same period, the dollar value of those loans fell from $20.6 billion to $17.96 billion, a 13 percent drop.
The pullback is partly a result of tighter credit availability among lenders and declining creditworthiness among borrowers. But it also reflects a big drop in consumer spending that is forcing small businesses across the country to put off expansion plans and cancel orders for new equipment.
“I get loan offers from banks all the time, and I just throw them away,” said Mark Harris, a dentist in Riverside, Calif., who bought his practice three years ago.
Harris would like to buy a new digital X-ray machine among other upgrades, but he is wary of taking out a loan to cover the $40,000 purchase and setup costs.
“It's just too hard to predict my cash flow from month to month,” said Harris, whose business is down about 25 percent over the past year. “Several patients have canceled appointments lately because they're scared they'll get laid off if they ask for time off.”