Despite the stimulus measures adopted by the government in reaction to the global crisis, the security orientation of government financial institutions (GFIs) tends to have obstructionist impact on major projects that could otherwise provide momentum to sustained growth in key sectors.

The focus, according to a recent World Bank (WB) study, tends to fall on hard collateral rather than the quality of the cash flow of the project. Even then, where there are adequate collateral and quality cash flow, GFIs continue to require, as a non-negotiable condition, the joint and solidary suretyship (JSS) of a project’s principals.

This provision has become in fact the deal breaker for otherwise meritorious and viable projects.
Apart from direct expenditure intervention, government financial institutions (GFIs) could calibrate their financing policy to stimulate quantum investments in strategic sectors.

The JSS condition is a matter of policy rather than a charter provision of the GFIs. One GFI asserts that: “We are at the forefront of our country's transformation to a newly industrialized country, in gearing up the engines of economic growth.”

Ironically, many project proponents have avoided dealing with GFIs because of the JJS stipulation.

How does the JSS condition of GFIs square up with the policy of international financial institutions (IFIs)? In carrying out their private sector financing, neither the International Finance Corp. (a World Bank affiliate) nor the Asian Development Bank (ADB) require the JSS of a project’s principals.

Export credit institutions of developed countries aggressively assist their exporters and do not require JSS as a standard condition.

Should our domestic GFIs impose more stringent requirements than IFIs that are conventionally viewed as conservative institutions? Should the policies of GFIs be geared to enabling our entrepreneurs to be internationally-competitive?

In essential terms, what is the value added provided by a JSS? It is largely illusory. It is argued that requiring a JSS makes the principals more committed to a project and its financial obligations. In reality, financially responsible principals tend to shy away from allowing financing policy to pierce the corporate veil and intrude into personal finance.

It is not uncommon for principals with lower credit standing to stand ready to stake their personal resources. By definition, then, borrowers with lower credit quality are more prone to accept the non-negotiable condition of GFIs.

Based on international best practice, loan quality ratings lean heavily on the quality of the borrower’s cash flow as the first line of defense. In fact, collateral coverage and JSS do not have a material bearing on loan quality and the provisioning required by regulators.

When the chips are down and the corporate borrower’s resources have been exhausted, could the lender effectively recover from the principals who have signed the suretyship agreement? In the context of the current state of the rule of law, survival-inclined borrowers resort to the court system to block recovery efforts by lenders. Very often, foreclosing on collaterals and enforcing JSS provisions become an elusive and frustrating exercise.

Introducing flexibility on the JSS condition would result in drawing in more high quality credits into the portfolios of GFIs. In the process, more projects with high economic impact are brought to the implementation stage.