BSP extends lower credit risk weighting for MSME loans

MANILA, Philippines — The validity of the lower credit risk weighting for loans for micro, small and medium enterprises (MSMEs) has been extended by another six months to further encourage banks to lend more to the sector badly affected by the COVID-19 pandemic, according to the Bangko Sentral ng Pilipinas.

BSP Deputy Governor Chuchi Fonacier said the Monetary Board issued Resolution 1378 last Sept. 16 approving the amendments to the BSP relief measure on the relaxation of the credit risk weight for loans to MSMEs under the central bank’s risk-based capital adequacy frameworks.

“The extension of the relief measure aims to encourage lending to MSMEs and ensure their continued access to financial services,” Fonacier said.

The relief measure expired in end–2021, but the regulator issued Memorandum 2022 – 04 exteding several prudential relief measures, including the lower credit risk weighting for MSMEs until December.

Under Memorandum 2022–041, Fonacier said the relief measure has been extended by another six months or until June 30 next year.

Fonacier said MSME exposures that meet the criteria of a qualified MSME portfolio as well as current exposures that do no qualify as a highly diversified MSME portfolio shall be assigned a credit risk weight of 50 percent under the Basel risk-based capital adequacy frameworks.

During the height of the pandemic in April 2020, the BSP 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 the previous 75 percent under the Manual of Regulations for Banks (MORB).

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

The BSP implemented regulatory relief measures to reduce the financial burden on MSMEs as the economy stalled due to strict COVID quarantine and lockdown protocols.

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

The BSP requires banks to keep a minimum amount of cash reserves with the central bank determined by the amount of deposit liabilities owed to customers.

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.