The DTI’s MSME Development Plan Progress Report contains very revealing data on MSMEs’ access to credit from formal financial institutions. Recall that in 2008, Republic law n ° 9501 prescribes that banks must set aside 8% of their total loanable funds for micro and small businesses while 2% should be allocated to medium-sized businesses.
The law lapsed on June 16, 2018, but BSP continues to monitor the banking sector’s exposure to MSMEs. Clearly, the allocation has seen a sharp drop, with the following data: a) 2017: 3.32% of micro and small enterprises (MSE) and 5.03% of medium enterprises (ME); b) 2018: 3.12% MEP and 4.55% ME; c) 2019: 2.8% MEP and 4.3% ME and d) Q12020: 2.09% MEP and 3.31% ME.
Even before the 2020 pandemic, the share of loans to MSMEs in the total banking book was declining significantly. Mandatory credit alone was already not working to move this initiative forward and it is getting worse even without the warrant. The pandemic with its containment hits the small and medium-sized ones harder Fiwho suffered from the lack of economic activity and mobility of people.
Nationwide closures have disrupted economic activities and slowed overall growth. Businesses, in general, are struggling to repay loans due to losses and bleak prospects. This has resulted in slower lending growth in the banking sector, as banks have to be more careful and demanding in granting credit. And when banks slow down lending, the first group of disenfranchised customers are those who are seen as small, vulnerable, and with very little lifeline through equity.
This author has followed the banking industry’s history of mandatory compliance in his previous posts, and historically the compliance mandate has assisted MSMEs in its early implementation.
In 1991, the law required banks to reserve 5% of their net loan portfolio for small businesses. This was revised in 1997 to 6% for small businesses and 2% for medium-sized businesses. In 2002, the compliance rate was 30% high, 17.40% for small and 12.60% for medium. As he unraveled off, it was still 8.46% for MSMEs and 7.94% for MEs in 2010.
Let me step back a bit by stating categorically that, in this author’s opinion, mandatory law has worked for SMEs because there is a market ready to be served. The same cannot be said of the 25% agri-agra compliance law, however, which is unrealistic and out of proportion to the number of potential customers. This is especially true of the agrarian part of the law with its unsustainable demands as it is obvious that there are not enough borrowers ready in proportion to the overall demand for credit. Mandatory compliance laws must be rational, reasonable, proportionate and enforceable. It cannot be based on a pipe dream.
Having clarified this position, it is necessary to do a thorough study of what has happened over the past 10 years or so so that MSME clients have been disadvantaged by the banking sector in the decision to grant credit. Considering that statistically the large business tally of all Philippine businesses represents 0.49% of the total, is it too much to ask to ask for a mandatory allowance for the rest of the 99.51%? The Philippine Statistics Authority (PSA) 2020 survey recorded a total of 957,620 business enterprises operating in the country. Of these, 952,969 are MSMEs. And the last count of bank loans granted to them is only 5.4%.
A March 2021 study by the Asian Development Bank Institute of Southeast Asian Countries found that a quarter to half of the MSMEs in the sample experienced temporary lockdowns and a third two-thirds were faced with a lack of liquidity. The impact of the pandemic on employment and the sustainability of businesses has been quite severe. MSMEs are inclined to use up their cash and cut jobs.
From a banker’s perspective, it’s understandable that these companies are no longer a priority. So the recent downtrend is no surprise. However, note that this drop occurred even before the pandemic. So we cannot use the current circumstances as an excuse, although she is now a major contributor.
Policymakers need to consider why the mandatory allocation policy worked between 1991 and 2010, and what contributed to its ineffectiveness over the past 10 years. Among the questions worth exploring are the following: First, what oversight mechanism was used? Is the identification of the MSME market done correctly? Second, was the structure of the sanctions proportionate enough to draw attention to the sector? Could it be that paying a penalty is an easier solution? Third, what accompanying regulations have been promulgated to support the sector? Would there have been contrary policies in place? Fourth, have the agencies responsible for monitoring compliance been given sufficient power and authority to review actual compliance? And finally, has the MSME sector been represented in the development of guidelines and regulations so that their interests are safeguarded?
MSMEs will be the key to the Philippine recovery once we are able to move towards the new normal. Their FiFinancing needs must be addressed in one way or another in this march towards reviving our economy if they are indeed the economic backbone of the Philippines.
The opinions expressed in this material are his own and do not necessarily reflectflect the opinion of his office as well as that of FINEX.
Benel Dela Paz Lagua was previously Executive Vice President and Director of Development at the Development Bank of the Philippines. He is an active member of FINEX and an advocate for risk-based lending for SMEs.