BSP eases rules to encourage bank lending to small firms

The central bank on Tuesday (May 5) rolled out new measures to encourage a steady flow of credit to small firms—many of which have been hit severely by the ongoing economic slowdown—by easing banking rules meant to guard against a buildup of bad loans.

In a statement, the Bangko Sentral ng Pilipinas (BSP) said its Monetary Board approved prudential measures “to assist the micro-, small- and medium enterprise (MSME) sector carry on with its business during the coronavirus disease crisis, as well as hasten recovery and sustainability of MSME operations in the post-crisis period.”

The first set of policies included amendments to the regulatory capital treatment of exposures to MSMEs, which free up capital and enable supervised financial institutions to extend more credit to the MSME sector.

These included the temporary reduction in the credit risk weights of loans granted to MSMEs that are current in status, and the assignment of a lower risk weight for MSME exposures that are covered by guarantees.

The central bank justified this move — which effectively reduces the buffer banks must put up in case their loans to small firms go sour — saying the MSME sector is a vital component of the Philippine economy owing to its capacity to generate employment and contribute to economic activity across a wide range of industry sectors.

Based on 2018 statistics, MSMEs accounted for 99.5 percent of the total business establishments operating in the country and generated 5.7 million jobs, equivalent to 63.2 percent of the country’s total employment.

Moreover, the MSME sector contributed 35.7 percent in terms of value added and accounted for 25 percent of the total export revenue of the country.

The central bank said the credit risk weight of loans granted to MSMEs that are in current status was reduced to 50 percent from 75 percent for diversified MSME portfolios with at least 500 borrowers over a number of industries, and 100 percent for non-diversified MSME portfolios.

The regulator also assigned a zero percent risk weight for MSME loans that are covered by guarantees.

The BSP approved the assignment of a zero-percent risk weight not only to loans that are guaranteed by the Philippine Guarantee Corp. but also to loans that are guaranteed by the Agricultural Guarantee Fund Pool and the Agricultural Credit Policy Council.

To enable stand-alone thrift banks, rural banks and cooperative banks to continue to support their MSME- and rural community-based clients, the BSP deferred by one year the implementation of the revised risk-based capital framework applicable to these banks that should take effect on the first day of 2022.

Finally, the BSP extended banks’ reporting period for bad loans of borrowers affected by COVID-19 until the end of next year.

“These policy issuances reinforce earlier pronouncements of the BSP which recognize MSME loans as alternative compliance with the reserve requirement as well as relax the know-your-customer requirements for retail clients to facilitate their access to formal financing channels,” the central bank said.

“Overall, these measures are expected to channel liquidity directly to the MSME sector while ensuring the health and safety of the financial system,” it added.

Edited by TSB