Banking on MSMEs: Making business loans easy

By Marissa Mae M. Ramos, Researcher

“WE HAD A MOTHER and son team who have been managing a gas service station in the Visayas. They would often use their credit cards for their fuel purchases and would regularly pay every two months. They never went to a bank for financing because they did not want to be bothered by too many documentary requirements and continuous negotiations,” shared Bank of the Philippine Islands (BPI) Business Banking Head Eric Luchangco in an e-mail interview with BusinessWorld regarding one of their clients’ experience.

“The second visit of our sales officer was to deliver the news of an approved business loan with an advice of how the lowered interest rate and longer term will transition their business to the right operating cycle. The son is already thinking of a second gas station as soon as the loan is fully paid,” Mr. Luchangco added.

This is among the many micro-, small-, and medium-sized enterprises (MSMEs) in the country that are leveraging on bank loans. However, these cases are few and far between as the sector still sees lack of readily available credit. For instance, the World Bank’s Enterprise Survey in 2015 listed access to finance as the third biggest obstacle of MSMEs in the country.

“The MSMEs are hesitant to approach formal lending institutions in availing business loans primarily due to lack of acceptable collateral, credit knowledge and credit history. Moreover, MSMEs may also get intimidated by the documentary requirements in applying for business loans,” Bangko Sentral ng Pilipinas (BSP) Deputy Governor Chuchi G. Fonacier said in an e-mail interview.

The government recognized early on the potential of the sector in promoting sustainable development.

The Philippine Statistics Authority’s 2018 List of Establishments showed there were over one million business enterprises operating in the Philippines during the period, of which 99.52% or 998,342 firms are categorized as MSMEs. Of these, MSMEs account for 63.19% of the country’s total employed population, but only contribute 35.7% of gross value added.

As early as 1991, a Magna Carta for MSMEs was enacted by Congress. It was later amended by RA 8289 in 1997, and further amended by RA 9501 in 2008.

In the 2008 amendment, it prescribed that for a period of ten years from June 17, 2008 to June 16, 2018, banks must set aside 8% of their loanable funds for micro- and small enterprises (MSEs), while 2% should be allotted for medium-sized firms in order to provide them the credit needed for their operations and expansion.

Rather than lend to this segment, lenders chose to evade this provision and pay penalties instead.

“The difficulty in compliance may be attributed to several factors such as incompatibility to individual bank’s business model and target market, as well as difficulties in on-boarding of MSEs particularly in establishing their creditworthiness,” said BSP’s Ms. Fonacier.

Latest estimates showed the banking system lent P551 billion to MSMEs in the first nine months of 2019, lower than the P564 billion shelled out the previous year.

Moreover, exposure of banks to medium enterprises were well-above the required two-percent requirement. However, loans to MSEs were only at 2.8% versus the mandated eight-percent.

Ms. Fonacier said the BSP has undertaken a three-pronged approach to improve MSMEs’ access to finance. First, the central bank has put in place “needed financial and digital infrastructure to mitigate risk and lower cost of financing.”

Among these market-enabling infrastructures include the national ID through the Philippine Identification System Act or the PhilSys Law (RA 11055); a national credit information system from the Credit Information Corp. (CIC) which is tasked to develop and maintain a “comprehensive and centralized credit information system”; and, a credit risk database (CRD) through a technical cooperation program of the BSP with Japan International Cooperation Agency.

“The CRD is a tool from Japan which uses financial statements and default-related data to build statistical models predicting the creditworthiness of SMEs (small and medium enterprises). It is expected to increase access to finance among SMEs through risk-based lending and lessen the dependence of banks on collateral,” said Ms. Fonacier.

Second, the BSP is also promoting “innovative approaches in MSME financing.” Ms. Fonacier cited BSP’s partnership with the Asian Development Bank in developing the pilot program of Agricultural Value Chain Finance with select banks that will gauge creditworthiness of agri-entrepreneurs through their entire value chain.

Furthermore, the BSP also has an ongoing partnership with the Department of Trade and Industry and key industry players such as the Microfinance Council of the Philippines and Alliance of Philippine Partners in Enterprise Development in developing a financing ecosystem for MSMEs through Negosyo Centers.

Third, Ms. Fonacier said the BSP has undertaken several initiatives to bridge the “information gap” to understand the needs of MSMEs such as regular financial learning seminars for microfinance clients and the central bank’s participation in global discussions on MSME issues.

“The BSP is exploring the possible conduct of a demand-side survey for MSMEs, which will be an in-depth and dedicated data collection methodology that could facilitate deeper analysis of the financial needs of the MSME sector, and guide the formulation of evidence-based policies for MSME finance,” Ms. Fonacier said.

Recently passed laws that are aimed to foster the development of MSMEs in the country were the Innovative Startup Act (RA 11337) which aims to create initiatives that will provide benefits and incentives to start-ups and start-up “enablers”; the Philippine Innovation Act (RA 11293), which promotes the “internationalization” of MSMEs through participation in local and global value chains; and the Personal Property Security Act (RA 11057), which aims to provide access to “least cost credit” and establish a “unified and modern legal framework for securing obligations with personal property.”

Likewise, the passage of the RA 10744 or the Credit Surety Fund (CSF) Cooperative Act of 2015 enabled a credit enhancement scheme that strengthens the credit worthiness of the MSMEs by pooling contributions of the public and private sector in a fund, with the fund acting as a security for the loan applied by the MSMEs.

“The number of CSFs increased from 45 as of end-December 2015 to 55 as of end-December 2019. Meanwhile, the prevalence of CSFs has enticed banks to lend to MSMEs as total loans increased since the CSF program was institutionalized in 2015,” Ms. Fonacier said.

“Based on the latest available data, these loans have been distributed to approximately 17,500 beneficiaries in 33 provinces and 21 cities,” she added.

WHAT DO BANKS HAVE TO OFFER FOR MSMES?
For Development Bank of the Philippines (DBP) President and Chief Executive Officer Emmanuel G. Herbosa, lending to MSMEs “does have its quirks.”

“It requires more assistance and handholding, especially in the aspects of risk management and cash management, as the entrepreneur is establishing himself and his business operations,” Mr. Herbosa said in an e-mail.

The promotion of MSMEs is one of DBP’s four main thrusts, Mr. Herbosa said. The bank’s umbrella program, Sustainable Enterprises for Economic Development (SEED), has a number of sub-programs with distinctive features targeted to a specific market.

Among these programs include the Inclusive Lending for Aspiring Women (ILAW) program, which caters to “women-owned and managed enterprises”; the DBP Enhancement for SETUP Technopreneurs (DBP-BEST), which provides loans to businesses already assisted by the Department of Science and Technology through its Small Enterprise Technology Upgrading Program (SETUP); and the OFW Reintegration Program (OFW-RP), which aims to provide viable income-generating activities for overseas Filipino workers.

According to Mr. Herbosa, the DBP lent P25.2 billion to the MSME sector as of Oct. 31 last year. The repayment terms depend on the business’ development period and cash cycle, ranging from 30 days to 15 years.

For its part, BDO Unibank, Inc. offers the “Kabuhayan” loan designed for MSMEs. According to BDO, loans can amount from P30,000 to P500,000, depending on borrowers’ capacity to pay. The program’s installment scheme can likewise stretch up to 36 months.

“In two years, we have lent to over 25,000 borrowers nationwide,” BDO said in a separate e-mail.

“To ensure payments, we do regular customer reminders and provide multiple payment channels, e.g. agency banking. MSMEs’ repayment behavior can be shaped by how we are able to service loan payments,” BDO said.

Meanwhile, Security Bank Corp. has the non-collateralized SME Business Express Loan (BEL) and Business Mortgage Loan (BML).

“BEL… is perfect for businesses looking to finance short-term needs whether it’s equipment, office spaces, or cash for day-to-day operations,” said Security Bank Vice-President and Head for Small Business Lending Division Remeliza Bontogon.

“Meanwhile…, BML is perfect for larger SMEs who are looking to make big purchases or investments to scale their business.”

Ms. Bontogon said that for SMEs, Security Bank can lend up to 80% of the property’s collateral value.

“BEL is a term loan facility with term options of 12, 18, 24 and 36 months. Its interest rates range from 1.4% to 1.95% monthly add-on, which translate to annual effective rate of 30% to 40%…BML is also a term loan facility, but with longer term options from five years (for permanent working capital requirement) to 10 years (for capital or asset acquisition). Interest rates range from 8% to 8.5% one-year price fixing to 9.25% 10-year price fixing,” Ms. Bontogon said.

Ms. Bontogon noted BEL’s “stronger traction,” indicating that not many of these firms have acceptable collateral to offer, but have businesses that are going concerns and have cash flow that help justify providing non-collateralized loans.

For BPI, Mr. Luchangco said the Bank reaches out to the SME market through their Business Banking segment.

“Recently, we developed various off-the-shelf loan offers and no-collateral loans with easy monthly payments. These parameter-based programs allow for an approval notice within two-days. Credit of loan proceeds take any time from 5 to 11 days,” he said, adding these are usually loan amounts of less than P5 million stretching up to five years without collateral.

Mr. Luchangco considered credit behavior to be a “critical factor” when considering whether to grant or reject business loan applications.

“Sometimes people think that a credit card which they did not pay five years ago will no longer affect them. This becomes part of an individual’s payment record and can weaken credit score. An applicant with a strong credit score may enjoy better interest rates, higher loan amount or even longer terms,” Mr. Luchangco added.