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Philippine banks may turn to middlemen to aid SMEs

Publication Date : 07-04-2014

 

The Philippine central bank is considering the establishment of conduits that can help banks comply with mandatory lending rules to small businesses, following the more successful model used for the agriculture sector.

The Bangko Sentral ng Pilipinas (BSP) said policymakers would need to find ways to make micro, small and medium enterprises (MSMEs) more financially viable.

This comes amid calls for amendments in the mandatory lending provisions under Republic Act 9405, or the Magna Carta for MSMEs, that says 8 per cent of all banks’ portfolios must be reserved for loans to small businesses.

“The assumption of the law was, if you throw money at a problem, it gets fixed. But that’s not the case. The money just gets consumed and the problem isn’t solved,” BSP Deputy Governor Nestor A. Espenilla Jr. said.

An Asian Development Bank (ADB) report released last week said most local banks would rather pay the annual fine of 500,000 pesos (US$11,145) than comply with mandatory lending to small businesses, widely considered to be risky bets.

We should think of ways that will make lending to MSMEs less perilous for institutions, Espenilla said.

“Banks exert a great deal of effort to comply. But at the end of the day, it’s a business decision. If they lend, and it’s not done prudently, they can lose the entire principal. Banks would rather face the penalties than lend to a sector they don’t understand,” he added.

He said the law should be amended to make way for conduits that could indirectly help banks comply with regulations.

A similar model is followed by the agriculture sector, where banks can lend to middlemen known as Rural Financial institutions (RFI). Loans to RFIs will enable banks to comply with the law on mandatory lending to farmers.

Banks, particularly universal and commercial banks that make up 90 percent of the financial system, have different business models, Espenilla said. Very few of them have the expertise in dealing with loans to small businesses.

The BSP previously backed the scrapping of the mandatory lending rules for the MSME sector, but this would require the repeal of the current law.

To replace these mandatory lending rules, Espenilla said, new measures should focus on making MSMEs more marketable.

Possible measures that can help MSMEs include guarantee programs that reduce the risk for banks. MSME managers should also be taught how to manage their books properly. Espenilla said banks would normally disregard small companies that lack proper documentation of its finances.

 

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