Philippine Star | 19 October 2017

Bangko Sentral ng Pilipinas Gov. Nestor Espenilla Jr. (File photo by JOSEPH AGCAOILI / Philippine Daily Inquirer)

Filipino entrepreneurs’ lack of access to affordable credit is stunting the growth of many micro, small and medium firms and crimping job growth, as a result—a situation that the country’s top banking regulator is worried about.

To remedy this situation, Bangko Sentral ng Pilipinas (BSP) Governor Nestor Espenilla has laid down a plan that would unclog bottlenecks in the financial system and reform outdated policies that result in banks charging often unwarranted risk premia on small businesses wanting to take out loans for operations or expansion.

“MSMEs are unable to reach their full potential due to a range of barriers, including financial access,” the central bank chief said, adding that the Philippine situation mirrors those of other countries. “Bank lending to MSMEs leave much to be desired comprising only 8.4 percent of total loan portfolio.”

Because of this, 80 percent of small businesses are “internally financed” while only 10 percent are bank financed, unlike large corporations that can load up on credit for expansion while enjoying substantially lower interest rates.

MSMEs make up 99.5 percent of all registered businesses in the Philippines and contribute the largest share of total jobs generated at 61.6 percent. Despite this, small businesses account for only 35.7 percent of the total value of the country’s economic output as measured by its gross domestic product.

“At the BSP, we are troubled by these numbers and take them seriously,” Espenilla said. “We have been hard at work providing the regulatory environment that will create a more inclusive financial system.”

In particular, he described these issues afflicting small businesses — higher costs, credit information asymmetry and lack of supporting market infrastructure, among others — as “deeply ingrained barriers to financial access” and “market frictions” that should and “can be addressed without compromising on other policy objectives.”

To promote MSME access to finance, Espenilla said regulators have pursued continuing prudential reforms to improve the overall environment for credit allocation in the economy. BSP implemented the comprehensive credit risk management guidelines for banks under the rationale that, with robust credit risk management, banks can be more flexible, extend more credit, and implement innovative credit products and lending programs.

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

Thus, under the new framework, MSMEs that are “fundamentally good businesses” will still be able to access cheap loans even without collateral, the BSP chief concluded.

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