Improving credit access

Despite plentiful opinion on the importance of micro, small and medium enterprises (MSMEs) to the economy, entrepreneurs continue to struggle to access loans from the financial system.

This is despite the existence of the Magna Carta for MSMEs, a law mandating banks to set aside 8 percent of their loans to
micro and small ventures and 2 percent to medium enterprises.

Their plight has not escaped the new governor of the Bangko Sentral ng Pilipinas, Nestor Espenilla, who promised last week to lay down a plan to improve MSMEs’ access to bank credit and recast outdated policies that result in banks charging unnecessary risk premiums on small businesses needing loans for their operations.

“MSMEs are unable to reach their full potential due to a range of barriers, including financial access,” the central bank chief noted. Bank lending to MSMEs truly leaves much to be desired, comprising only 8.4 percent of the banking industry’s total loan portfolio.

Given the difficulty in accessing bank financing, 80 percent of small businesses are internally financed, unlike large corporations that borrow billions of pesos at substantially lower interest rates.

A Deloitte-Visa survey noted as early as 2015 the difficulty of small enterprises in accessing bank credit. It noted that total bank loans extended to small and medium-sized Philippine enterprises amounted to only $9 billion in 2014, compared to Thailand’s $171 billion — the highest in the region.

Personal funds were the dominant source of financing among these smaller firms. The survey also cited many nonfinancing challenges faced by small and medium-sized firms, among them rising business costs, difficulty of finding quality labor, intensifying competition, unstable demand and the multitude of government regulations.

The survey found that access to financing was a key challenge for local SMEs, with most Philippine lenders requiring collateral before extending credit, citing other financing barriers such as slow fund disbursement due to lack of credit information, lack of bank and government guidance on the preparation of compliance documents, and high interest on loans due to risks faced by banks.

Governor Espenilla noted that MSMEs made up 99.5 percent of all registered businesses in the Philippines and contributed the biggest share of total jobs generated at 61.6 percent.

Despite this, small businesses accounted for only 35.7 percent of the gross domestic product (GDP).

“At the BSP, we are troubled by these numbers and take them seriously,” Espenilla said, adding that they were working hard to provide the regulatory environment that would create a more inclusive financial system.

The intention of Espenilla’s plan is for banks to focus on cash flow analysis and ability to pay rather than collateral when determining a borrower’s creditworthiness. Indeed, collateral—particularly real estate — should play only a secondary role in credit decisions.

And Espenilla promised that under the new framework he would lay down, MSMEs that are “fundamentally good businesses” would be able to access cheap loans even without collateral.

This can easily tie in with the BSP governor’s earlier policy statement to release more money into the growing economy. He wants to reduce banks’ statutory reserves to single digits from their current level of 20 percent of total deposits held in the BSP’s vaults.

A lower reserve requirement for banks will free up the idle cash for more productive uses, like lending to job-generating activities.

Each percentage point cut in the reserve requirement frees up as much as P70 billion of these deposits. In effect, a reduction to single-digit levels has the potential to release into the financial system more than P700 billion in cash over the medium term.

We hope a big portion of this will go to finance the productive operations of MSMEs and, as a result, generate new jobs and eventually help uplift the living conditions of many of those dependent on these homegrown enterprises.