MSMEs need credit lifeline

Bank loans have traditionally fueled the operations of businesses to augment whatever capital the owners have put into their enterprises. Since March this year, however, bank lending growth has been slowing down as the economy reeled from the economic impact of the strict lockdown imposed by the government to contain the spread of COVID-19.

According to the Bangko Sentral ng Pilipinas, the increase in the outstanding loans of universal and commercial banks eased to 2.8 percent in September from 4.7 percent in August. This was the sixth straight month of deceleration in bank lending expansion since the 13.6-percent growth in March. On a month-on-month basis, outstanding bank loans in fact decreased by 1 percent last September. Loans to manufacturing companies were down 2.6 percent, while those to wholesale and retail trade firms shrank by 3.4 percent.

The slowdown reflected the reduced tolerance among banks for risk, coupled with a decline in loan demand due to weak business prospects, according to the Bangko Sentral. One other reason banks are tightening on lending is that they have to contend with an expected spike in delinquencies. The banking sector’s non-performing loans (NPL), or those unpaid for at least 30 days after due date, had ballooned by 60 percent in September to P365 billion from a year ago. This amount was equivalent to 3.4 percent of the banking sector’s total outstanding loans, the highest NPL ratio since May 2013.

The Bangko Sentral had lowered its policy interest rates, the basis of bank loan rates, and the reserve requirement on bank deposits in a bid to release more money into the system and spur productive economic activities such as manufacturing and trade. This was to augment the limited funds the government has for pump-priming the economy since it must allocate the bulk of its resources to efforts to fight the pandemic. However, while an estimated P1.7 trillion in additional liquidity was released via these Bangko Sentral measures, this did not go to productive lending. Instead, the money went to treasury bills and bonds and blue-chip stocks.

It is understandable for banks to hold back on new loan approvals. Bank officials have a prudential duty to stockholders to keep their banks liquid and meet profit targets. However, while it is true that most banks have been reporting declines in net incomes during the past two quarters due to the impact of the health crisis on the economy, they remain robustly profitable.

“The Philippine banking sector actually grew by a zooming 18.5 percent in the second quarter, even as the economy reeled under a deep 16.5 percent contraction,” economist and Inquirer columnist Cielito Habito pointed out in his column last week. “In the first half of the year, when the economy was in a -9 percent recession, the profit growth of our top banks before provisioning (that is, setting aside allowances for anticipated bad loans) was reported to range from 33 to 120 percent—and even after provisioning, profits still ran in the billions.”

Many corporate borrowers, on the other hand, have reported immense financial losses from their weakened operations, most notably those in the travel and tourism sector (airlines, resorts, and gaming) which bore the brunt of the impact of the pandemic-induced recession. Add to this the thousands of capital-starved micro, small, and medium enterprises (MSMEs) that suddenly had to downscale their businesses due to the crisis. To continue operating, they had to cut expenses by laying off people, reducing production as demand weakened, or borrowing from relatives and other sympathetic parties as banks stopped extending new loans.

While financial help from the government is lacking, some hard-up entrepreneurs got assistance from landlords through rent condonation, and from banks through a moratorium on loan payments provided in the Bayanihan law. To continue surviving this crisis, however, they need working capital even for their limited operations. With many having used up their savings, the only remaining source would be the banks.

The challenge is to find the balance between the need of companies, especially MSMEs, for credit to keep them in operation, and the need of banks to remain financially healthy. The Bangko Sentral can only exert moral suasion on lenders to extend more loans. What is vital is for everyone to realize that creditors and borrowers need each other to survive this period of economic difficulty. Shutting off the credit faucet and leaving MSMEs twisting in the wind, at precisely the time when they most need the lifeline, will eventually impact on the financial and social standing of banks as well. At the end of the day, banks cannot just think of their survival. The survival of their borrowers and communities is their survival as well.