Alternative to ‘5-6’ lending

Mention the numbers “5-6” to the man on the street and the first thing that usually comes to mind is Indian nationals (or Bombays, as they are fondly called) going around the public markets or depressed areas offering to lend money to people who need it fast. The terms of the loan are simple. It can be in cash or as payment for a product that the borrower wants to purchase. No collateral is needed to secure its payment. As proof of the loan, the borrower simply signs opposite his name on a small notebook that shows the amount borrowed or product bought.

A background check on the borrower’s creditworthiness is seldom conducted. Often, it’s enough that he has a permanent address, not a transient of the place. The transaction can be completed in minutes and no other documents are signed or exchanged. If the credit extended is, say, P5,000, the borrower has to pay P6,000 after a month. The lender will come at the appointed date to collect the payment. Once the debt is fully paid, the borrower’s entry in the notebook is crossed out and he becomes eligible for another loan.

Trade Secretary Ramon Lopez wants to put an end to this kind of transaction because it translates to an interest rate of 20 percent a month, which is way above commercial lending rates.

To meet this objective, Lopez said the government would set aside P1 billion next year to lend money to micro and small enterprises at 2-percent-a-month interest, with P2,000 as the minimum loan. According to reports, 98 percent of registered businesses in the country are micro, small and medium enterprises and they employ more that 50 percent of the national workforce.

This is not the first time that the government has made plans to reduce, if not eliminate, the lending scheme that is identified with Indian nationals. But the trade continues, and has even expanded, in spite of the increase in the number of financing and credit firms. It’s doubtful if the proposed cut in the interest rate to 2 percent a month will wean away micro and small businessmen from the 5-6 lending scheme.

The principal reason for the popularity or acceptability of this transaction is convenience. The borrowers do not have to look for the lenders. The latter go to the public markets or places where they think there are people who need quick cash and have the capacity to pay the loan. On the other hand, if a prospective borrower wants to apply for a loan with a financing company or a bank, he has to dress up (or at least look presentable) and visit its office, which is not only inconvenient but can sometimes be intimidating.

Also working in favor of this grassroot-style lending is the absence of the paperwork that usually accompanies borrowing from formal lending sources. There is no need to present copies of income tax returns or other proof of ability to repay the loan. It’s all a matter of faith. The lender assumes that the borrower will not renege on his promise to pay the loan when it falls due. If the borrower absconds, that’s considered part of the risks of doing business.

For the lender, the 20 percent interest a month is sufficient compensation for the possibility of failing to collect some loans or, worse, getting mugged while in the process of during his rounds. On the part of the borrower, the exorbitant interest rate is considered a bitter pill that they have to swallow to be able to fund their small business or enjoy the small pleasures of life.

The key to putting an end to the 5-6 lending scheme is matching the lenders’ advantage in convenience or easy accessibility. The planned lending facility should have a visible presence in public markets or in areas where micro and small enterprises ply their trade so they need not go far if they want to secure additional funding for their business.

The documentation of the loans can be ticklish. Because public funds will be lent out, the transactions will have to comply with existing banking and audit regulations. The loans should be processed as fast as possible and with the minimum of paperwork without sacrificing the need to ensure that they are paid. Collection can be a problem too. Because public money will be lent out, the borrowers may treat them as dole-outs to which they are entitled and therefore need not be paid.

The proposed alternative to 5-6 lending scheme should be carefully studied before its implementation to avoid precious taxpayers’ money going down the drain or winding up in the pockets of unscrupulous politicians.