Bank -shutterstock_1#D8773FBank lending conditions in emerging economies tightened abruptly to their weakest level in three years in the first quarter of 2015, according to the latest Emerging Markets Bank Lending Conditions Survey from the Institute of International Finance (IIF).

"The sharp tightening of EM bank lending conditions is further evidence that emerging market economies are struggling," said Charles Collyns, Chief Economist at the IIF. "In addition to a demand slowdown, supply conditions continued to deteriorate. Banks reported a continued tightening in funding conditions, likely reflecting the cautious tone in EM financial markets, at least until the March FOMC (Federal Open Market Committee) meeting."

The composite index of the IIF's Bank Lending Survey dropped 1.7 points to 48.1 in Q1 2015, the lowest since Q4 2011. An index reading below 50 reflects a tightening in bank lending conditions. This tightening in lending conditions was driven by a sharp decline in loan demand, whose index fell to the lowest level in the series starting Q4 2009.

The index for domestic funding conditions edged up 1.5 points to reach 50.7 in the first quarter of 2015. This was primarily driven by a substantial improvement in funding conditions in EM Asia, even as funding conditions in other regions tightened.

By region, EM Asia and Latin America drove the overall tightening in bank lending conditions. Lending conditions in EM Europe also entered tightening territory after easing in 2014. The improvement in bank lending conditions in the MENA region continued to moderate, probably reflecting the impact of weaker commodity prices since the second half of 2014.

The survey covered 130 EM banks and was conducted between March 12 and April 23, 2015.