By Lee Chipongian
The Bangko Sentral ng Pilipinas (BSP) has significantly lowered the risk weight imposed on banks’ loans to the micro, small and medium enterprises (MSMEs) to free up more funds to this sector.
The BSP’s Monetary Board has approved to reduce the risk-based capital adequacy to 20 percent from 75 percent for qualified MSME portfolio – these are loans guaranteed by a Credit Surety Fund (CSF) Cooperative, and comply with other requirements.
“This policy intends to facilitate the increased flow of funds to MSMEs that will translate to the further growth of the sector and of the domestic economy,” according to the BSP.
The central bank’s CSF Program, which started in 2008, was made into a law as Republic Act No. 10744 (Credit Surety Fund Cooperative Act of 2015). To be considered for the lower risk weight, the guarantee should come from a qualified CSF which the BSP said is compliant to the law and its implementing rules and regulations.
This means the CSF Cooperative should at least have an initial leverage ratio of three. “A CSF Cooperative can guarantee MSME loans up to three times of its capital. The leverage ratio can be subsequently increased subject to review of the performance of the CSF Cooperative,” said the BSP.
Banks are closely monitored for their capital adequacy ratio or CAR, which is asset quality calculated as qualifying capital to risk-weighted assets. The CAR ensures that a bank has the capital to match the risks it takes in their credit and operations.
Prior to the amendment, the BSP was imposing 75 percent credit risk weights to small and medium enterprises (SME) or MSMEs tagged as qualified portfolio, and 100 percent for other SME exposures.
Businesses that are MSMEs or SMEs are enterprises with asset size of P100 million and below. Banks’ exposures are usually as direct loans or through other facilities such as guarantees. To be considered as qualified portfolio, it must be “highly diversified” and have a past due ratio not exceeding five percent.
BSP Governor Nestor A. Espenilla Jr. has expressed concerns that there is not enough credit access for MSMEs and this has prevented the sector to achieve its potential for growth.
Banks’ MSME loans comprised only 8.4 percent of total loan portfolio. About 80 percent of SME investments are still internally financed while the banking sector finance only 10 percent of this sector.
So far, the BSP has implemented various policies and reforms to improve MSMEs’ access to finance, such as the comprehensive credit risk management guidelines for banks which aimed to encourage banks to be more flexible in their lending to the sector.
The BSP also implements the CSF Program which is a credit enhancement scheme to “improve the credit worthiness of MSMEs that experience difficulty in obtaining bank loans.” There are a total of 48 CSFs created by the BSP and bank credit has reached P3.25 billion.