Bank loans to MSMEs slump 17% in 2020

MANILA, Philippines — Bank loans to micro, small, and medium enterprises (MSMEs) slumped by 17 percent to P480.5 billion in 2020 from P579.13 billion in 2019 as the sector was affected by massive shutdowns due to strict mobility and quarantine restrictions amid the pandemic, according to the Bangko Sentral ng Pilipinas (BSP).

The amount, which was only equivalent to 5.71 percent compliance ratio, continued to fall short of the required 10 percent threshold mandated under Republic Act 6977 or the Magna Carta for MSMEs.

The law mandates banks to earmark eight percent of their total loan portfolio for micro and small enterprises and two percent for medium enterprises.

The BSP data showed the banking system’s total credit allocation to micro and small enterprises declined by 18.5 percent to P186.12 billion in 2020 from P228.36 billion in 2019 and remained short of the mandated eight percent as it only accounted for a 2.21 percent compliance.

Likewise, funds allocated to medium enterprises fell by 16 percent to P294.38 billion from P350.77 billion. This translated to a compliance ratio of 3.5 percent, exceeding the required two percent.

The industry’s total loan book inched up by 3.3 percent to P8.42 trillion in 2020 from P8.15 trillion in 2019. This means allocations for the MSME sector should have reached P841.26 billion.

MSMEs play an important role, contributing 35.7 percent of the total value added to the economy and accounts for 99.5 percent of the total establishments. The sector employs 62.8 percent of the total labor force.

However, MSMEs are unable to reach their full potential because of difficulty of credit and financial access, especially now that banks are risk-averse due to uncertainties brought about by the COVID-19 pandemic.

The BSP has been adopting regulatory relief measures to reduce the financial burden on MSMEs. The Monetary Board approved the temporary relaxation in the assigned credit risk weight for MSME lending in the computation of risk-based capital adequacy framework to 50 percent from 75 percent.

A lower credit risk weight would allow banks to lend more to the MSME sector than setting aside the amount to comply with capital requirements.

The regulator also approved the inclusion of MSME loans in banks’ compliance with reserve requirement ratios to ensure adequate liquidity and credit in the financial system.

The BSP slashed the RRR for universal and commercial banks by 200 basis points and for mid-sized and small banks by 100 basis points last year. It also reduced the minimum liquidity ratio (MLR) for stand-alone mid-sized and small banks to 16 percent from 20 percent to release more funds for lending.

The Monetary Board also slashed interest rates by 200 basis points this year, bringing the overnight reverse repurchase rate to an all-time low of two percent.

According to the BSP, measures are needed to mitigate the risk of financial sector volatility in light of unfolding global developments. These would also lower the borrowing costs for affected firms and households.