BSP bucks mandatory lending to MSMEs

MANILA, Philippines - The Bangko Sentral ng Pilipinas has urged lawmakers to consider other options in encouraging banks to lend to micro, small, and medium enterprises (MSME) aside from the mandatory lending provided by law.

“We should think of ways to make it less penal on the institutions and actually contribute to the target which is the MSME lending,” BSP Deputy Governor Nestor A. Espenilla Jr. told reporters.

“The real policy problem is you want to promote lending to MSMEs but what is the proper intervention? Forcing banks to lend is one intervention but there are other interventions that are constructive,” he said.

RA 9405 or the Magna Carta for MSMEs requires banks to allocate 10 percent of their credit portfolio for small businesses. Specifically, eight percent of their loan portfolio should be set aside for micro and small businesses, while the another two percent should be allocated for medium-sized firms.

Espenilla said that other alternatives lawmakers and policymakers can push for include creating a good guarantee scheme for MSMEs.

“They can also develop a credit information system... or make MSMEs themselves more marketable by organizing them into supply chains,” Espenilla added.

“Another barrier why financial institutions don’t want to lend to MSMEs is the informality of documentations so they should be urged to do proper bookkeeping and to have proper records,” he said.

A recent Asian Development Bank (ADB) report found small businesses lacking proper access to formal credit in the Philippines as they instead rely on other non-bank financing options in order to fund their operations.

“Banks are exerting a big deal of effort to comply with the MSME law but it’s also a business call for the banks,” Espenilla said.

“On one hand, if they lend and they don’t do it prudently, they can lose the whole principal so sometimes they decide not to lend. (On the other hand) if they violate the law there’s a penalty to be paid so they have to weigh these two things,” he said.

The central bank has been vocal about being in favor of scrapping mandatory lending such as those target to help the MSMEs and the agriculture sectors.

The BSP earlier said that banks are conflicted between lending to these sectors and following safety standards on extending loans especially to those deemed high-risk.

Latest central bank data showed lending by universal and commercial banks expanded by 19.4 percent to P3.795 trillion in February. Together with placements in the BSP, lending increased by 18 percent to P4.056 trillion.

Sustained growth in bank lending has been seen in the past few years on the back of rosy prospects on the economy. The economy expanded by 7.2 percent last year, surpassing market and government expectations.