LOAN applications and approvals in August 2009 fell significantly year-on-year, prompting research house ECM Libra Investment Research to say the development has thrown a spanner into its two months of bullish views on the general economy.

In its report issued yesterday, ECM noted a big year-on-year drop in loan applications and approvals for August. Applications dropped by 16.8 per cent, while approvals were down by 21.1 per cent.

It however said it was too early to get overly concerned and maintains its neutral view on the banking sector.

While still recording a 7.1 per cent growth in August, loans outstanding in the banking system was weaker than the 8.4 per cent registered in July this year.

But the local research house's concerns were directed at segments of loans that form an important part of the economy.

Although demand for credit in the household sector remained robust in the period reviewed, the report draws attention to the sudden shrinkage in business loan applications and the even sharper contraction in approvals.

It said weakness in loan applications could indicate a sudden lack of business confidence in strength of the economy, while the drop in approvals could in part indicate the weak quality of businesses seeking credit, which in turn were turned down by banking institutions.

Meanwhile, net non-performing loans ratio on a three-month basis stayed unchanged in August at 2.1 per cent but was marginally higher at 1.6 per cent on a six-month basis. ECM Libra said the delinquency situation remains well contained as it had expected.

The banking system's capitalisation improved further in August from the previous month, with the risk-weighted capital ratio at 14.6 per cent (from 14.2 per cent in July) and an overall core capital ratio of 13 per cent (from 12.6 per cent).