Lending by banks to small businesses has skyrocketed since the central bank approved a measure to count these loans as an alternative form of compliance with the reserve levels required of financial institutions.
According to Bangko Sentral ng Pilipinas Governor Benjamin Diokno, the banking system allocated an average of P195.9 billion loans for micro, small and medium enterprises as alternative compliance with the reserve requirements as of Sept. 23, 2021.
This level marked a substantial increase from the P8.7 billion average loans to these small businesses that were reported for the week ending April 30, 2020 before time policy was implemented. This is equivalent to 13.3 percent of the total required reserves, from 0.6 percent at the end of April last year.
“The BSP recognizes the crucial role of MSMEs in the economy,” the central bank chief told members of the Chinese Filipino Business Club in an online forum recently, explaining that it is the regulator’s policy to help funnel more funds to small businesses as well as larger firms that are not part of conglomerates weather the pandemic.
In addition, the policy making Monetary Board also approved prudential measures to assist small businesses, including temporarily amending the regulatory capital treatment of MSME exposures to reduce the risk weights of bank loans granted to these firms.
This has the effect of encouraging banks to lend to these firms since they will have to set aside less funds as loan loss buffers in case the borrowers default.
In addition, Diokno also said that the implementation of the revised risk-based capital framework for banks was also deferred from end-2021 to end-2022
At the same time, the period of relief on the reporting of past due and nonperforming loans of borrowers affected by the pandemic was also extended to Dec. 31, 2021 from the original timeline of March 8, 2021, subject to reporting to the BSP.
Recent gains in boosting lending to small businesses come after the central bank initiated a program last year to bring not just so-called “unbanked” individuals into the formal economy but also small businesses and entrepreneurs who currently have limited access to bank loans.
One initiative was the development of a standard business loan application form to enable the banking industry to meet smaller firms’ preferences for borrower-friendly and simplified processes. The initiative is also aimed at improving banks’ risk assessment and speeding up turnaround time for loan applications.
According to the World Bank, 81.2 percent of enterprises were being financed internally, while only 10.1 percent were financed by banks.