Credit access in the pandemic

The Bayanihan to Recover as One Act set aside an allocation of P55 billion to provide low interest loans to sectors severely affected by the coronavirus pandemic. Of this amount, P18.4725 billion is for the Land Bank of the Philippines, P10 billion for Small Business Corp. (P4 billion for MSMEs, cooperatives, hospitals and overseas Filipino workers and P6 billion for tourism); P6 billion for the Development Bank of the Philippines; and P5 billion for the Philippine Guarantee Corp. The remaining P15.5275 billion is a standby fund to be infused into Landbank and DBP as additional capital.

While this appears to be good news, please note that only around P40 billion is intended for the lending program. As I have written in another column, is this amount sufficient given the very bad state of the economy with most small businesses at standstill? Likewise, is the delivery and distribution system solely through the government financial institutions (GFIs) operationally efficient.

SME lending is primarily a distribution problem. Constraints like transaction costs, fixed costs in intermediation, economies of scale, distance and regulatory hurdles are aplenty. A large part of funds flow is handled by intermediaries, which is dominated by private financial institutions. It is important to use existing distribution channels that are close to the customers in order to efficiently reach out.

When the US Congress passed its Coronavirus Aid, Relief and Security Act (CARES), it opened several windows for small business and eligible non-profit organizations, veterans’ organizations, tribal businesses and individuals who are self-employed and independent contractors. It had an allocation of $670 billion for the Paycheck Protection Program. But what stands out is that the Small Business Administration (SBA), mandated to implement the program, will delegate authority to SBA-certified lenders to process application. In addition, federally insured depository institutions and credit unions as well as farm credit system institutions will be available to apply as approved lenders for the program.

In other words, the SBA expands its reach by accrediting the private sector financial institutions who have excess liquidity available for loans. Funds that have been allocated by Congress will multiply because of the leverage effects and should reach beleaguered businesses in a timely manner.

The SBA-certified lenders will be given delegated authority to speedily process loans. The SBA guarantees 100% of the outstanding balance, and that guarantee is backed by the full faith and credit of the United States.

In addition, the SBA waives all guaranty fees, including the upfront and annual servicing fees. Lenders do not collect fees from applicants. SBA will pay lenders fees for processing loans in graduated levels: five percent for loans not more than $350,000 and less than $2,000,000; and one percent for loans of at least $2,000,000. This is an interest subsidy and it is higher for smaller chunks.

This is not to discredit the government financial institutions. By way of disclosure, this writer has actively worked in a few of these institutions and yes, they have dedicated people who are mission- and developmental-driven. My concern is that the carrying capacity for direct loans, especially to the core small businesses, might be compromised. The risk rules from the regulatory perspective remain unchanged. And a direct lending program is limited to the allocated amount.

Another concern about the GFIs is that they are supervised just like any other institution and there may be constraints in terms of breaching certain limits on past due, loan defaults, capital adequacy, etc. In other jurisdictions, government policy banks are subjected to more benign regulatory standards that appreciate their development mandate. We are in pandemic crisis mode and the development thrust of our GFIs must be reinforced. In the case of the top two government banks, there is an unwritten pressure of competing as part of the top banks of the country and this means closely marking the metrics of the regular banking system.

Most economies have given outright subsidies to help their small businesses. South Korea, for example, has allocated 3.2 trillion won for 2.9 million eligible small businesses or self-employed people. They will receive 2 million won each in cash payments. Japan provides cash grants of up to Y2 million for companies seeing declines of 50% or more in year-on-year monthly revenue. Sole proprietors, including freelancers, will also be eligible for a maximum of Y1 million in subsidies.

We cannot afford direct subsidies on this scale as a country. But we can expand the reach of our limited funds by multiplying it through loan guarantees. Our Asian neighbors have tested credit guarantees as it helped stove off bankruptcies during episodes of financial crisis and calamities in the past. Credit guarantees will tap the resources that may be idle in private financial institutions. It is a catalyst. Enterprises that are not able to borrow without the guarantee system are made bankable. And for the financier, the risk weight should lower because of the guarantee coverage.

This is the right time to explore a more aggressive guarantee program that takes on calculated risks and that taps into the strength of the financial system, our private institutions. The problem with past guarantee initiatives in the country is the unwillingness of policy and regulation to absorb losses. Guarantee programs are second best economic solutions that skirt direct subsidy, and its success must be measured by the economic activity generated, the jobs saved and lives supported. The program must be willing to absorb risks.

Benel D. Lagua was executive vice-president and chief development officer at the Development Bank of the Philippines. He is an active FINEX member and an advocate of risk-based lending for SMEs. The views expressed herein are his own and do not necessarily reflect the opinion of his office as well as FINEX.