BSP wants more MSME guarantee/surety funding
The Bangko Sentral ng Pilipinas (BSP) recommends higher guarantee funding to incentivize banks to lend more to micro, small and medium enterprises (MSMEs) as part of post-pandemic measures.
BSP Governor Felipe M. Medalla said on Tuesday, July 26, that since temporary relief measures designed to support MSMEs during Covid times are winding down, a permanent solution and one that has a higher budget for guarantee finance should be in place for priority sectors such as MSMEs and the agriculture industry to channel funds to these critical areas.
“With good governance and funding, we can encourage lending to sectors that would otherwise have no access to credit. If these funds can be set up and covered by good governance, we can expand lending to MSMEs,” Medalla said during the Post-SONA Economic Briefing by the Marcos government’s economic team on Tuesday.
The long-term solution is a guarantee fund where the banks when they lose money lending to MSMEs do not absorb 100 percent of the loss, said Medalla. The next step now is for the government to decide how much fund to set aside as guarantee or surety, and how much is the sharing of losses to be absorbed by the lending bank and the state.
“(Also) how much is the guarantee fee. That’s where the subsidy comes. The guarantee fee will be lower than the actuarial requirements for the fund to break even. The reason that can happen is of course, government subsidy,” explained Medalla.
The BSP chief said the MSME credit concern is a fiscal problem, therefore the solution is also fiscal. It is the government “putting money where its mouth is” and “deciding how much funds to allocate to the guarantee fund and putting in all the safeguards.” He said this is the problem sometimes with guarantee funds, that “some loan has already soured and somehow it’s rescucitated and brought to the fund.”
Right now and until end-December 2022, the BSP’s temporary relief measures to ensure MSMEs will have access to credit during the pandemic include allowing peso-denominated loans to MSMEs and certain large enterprises that were critically impacted by the pandemic as forms of alternative compliance with banks’ reserve requirements against deposit liabilities and deposit substitutes.
Medalla said this relief measure is “not exactly a good long-term solution.” Banks still consider MSMEs as high-cost and high-risk with low margins.
“Some banks that are so specialized somewhere else may not actually get reduction in reserve requirements. So, in the long run, our view is lower reserve requirements for everybody,” he added. Currently, the reserve requirement ratio for big banks is 12 percent and 14 percent for thrift banks and other non-banks.
The BSP has been supporting MSMEs and the agricultural sector through their ongoing programs such as: credit enhancement mechanisms to encourage bank lending to MSMEs and agribusinesses through the Credit Surety Fund (CSF) and Credit Risk Database; and the promotion of non-traditional financing approaches such as agriculture value chain finance and supply chain finance.
The BSP has also reduced the credit risk weights of loans granted to MSMEs that are current in status to 50 percent from 75 percent for qualified MSME portfolio and 100 percent for non-qualified MSME portfolio.
The BSP is also working with the Cooperative Development Authority to improve funding access of MSMEs via the CSF. The CSF was established out of a need to channel funding to MSMEs since banks generally require collaterals which is a loan requirement that MSMEs have difficulty complying.
Meantime, the BSP plans to cut the reserve ratio when it cancels or withdraw the assistance to the MSMEs as alternative compliance to the reserve requirement. This pandemic-related relief measure will expire by end-December.
The MSME sector accounts for 99.5 percent of business enterprises and 63 percent of total employment. It is one of sectors that took a big hit because of the cessation of business activity during the long lockdowns of 2020 and 2021. A central bank survey said that about 60 percent of MSMEs have stopped operations as soon as the country was placed in lockdown in 2020.