Paving the way for MSMEs to gain access to cheap credit

When it comes to access to finance, many unbanked Filipino entrepreneurs struggle with the fact that the higher the credit risk of an individual, the slimmer the chances of securing a loan. But things are about to change, as the Department of Trade and Industry (DTI) is in the middle of removing obstacles confronting micro, small and medium enterprises (MSMEs) in accessing cheap credit.

Six months ago, in response to the clamor of SMEs for accessible and cheap credit, the DTI launched the “Pondo para sa Pag-babago at Pag-asenso” program, or the P3 program. The initiative also seeks to wean SMEs away from the “5-6” loans that carry onerous interest rates.

The microfinancing program intends to give MSMEs better access to finance by doling out loans at an interest rate less than 3/4 of the rate given in 5-6 of 20 percent, and with no collateral needed.

Having secured a P1-billion supplemental budget in the middle of 2017, the microfinance fund is set to receive the same amount, this time as an official item in the DTI budget next year, according to Trade Secretary Ramon M. Lopez.

Lopez said microfinance is one of the major pillars of government efforts to help MSMEs grow. “When it comes to assistance for MSME development, there’s really two major types: the Shared Services Facilities [SSFs], and the microfinance part.”

The Small Business Corp. (SB Corp.), an attached agency of the DTI, implements the P3 program. It releases funds to nonbank micro-finance institutions (MFIs), associations, cooperatives and other conduits that already have delivery and management structures in place to lend out the funds. So far, the SB Corp. has accredited three national microfinancing institutions covering 75 provinces nationwide and 59 local conduits.

Beneficiaries are estimated at 22,422 individual business owners, and loanable amounts range from P5,000 to P100,000. Of the P1 billion, SB Corp. Vice President Melvin Abanto said some P827.5 million in approved credit lines have been extended to conduits.

Abanto said in a phone interview that the SB Corp. mandates a cap of 2.5 -percent monthly interest on MFIs and partner institutions. “Those who charge high interest say they do so because of their high operating costs plus the factor of risk. We’re trying to disprove that in our pilot areas, where we’re offering cheap funds, much lower than the 20 percent of 5-6, and even lower than the MFI rates.”

The SB Corp. is also trying to lend funds directly to market vendors in Sarangani, Mindoro and Leyte, instead of going through conduits.

“What we found out is that there’s a lot of room for lowering the prevailing interest rates in this particular market. The experiment is still small in scale, but there’s enough indication that, with a right system, it’s possible,” Abanto said.

The “right system” in this case means ensuring a fair assessment of risk due to the borrowers’ lack of credit and collateral, while ensuring that their access to loans won’t be hampered by red tape.

Abanto said safeguards are in place for both the borrower and the lending institution to ensure the judicious use of public funds. For the borrowers, they are required to present minimal documentation that their businesses exist, such as a business registration. On the part of the lender, there has to be a document that certifies a transaction took place, and the amount given. There must also be proof that the terms of the transaction­—the interest and the amount, for example—were complied with, and the means of collecting and paying are in line with the program.

The SB Corp. official said this is among the goals of having “adequate but minimum” requirements under the program: to make the borrowing process as easy as possible for clients while ensuring that government money does not go to “ghost borrowers”.

But the implementation of the P3 program is not without its share of challenges. One of the most pressing concern for the SB Corp. is how to ensure that the funds reach its intended beneficiaries. This dilemma is evident in the disbursement rate of MFI or  partner institutions. Of the P827 million extended to conduits, only P333 million have actually been loaned to entrepreneurs.

This is because the SB Corp. mandates that the funds should to go untapped markets. Many of the MFIs or cooperatives already have an existing network of borrowers, but they are not the target of the P3 program.

“The priority are the borrowers who are forced to get from 5-6, and from the perspective of the conduits, there are other issues with other costs involved, such as a marketing issue, or they have to identify new clients and devise new products to service the clients, so that may be influencing their disbursement rate,” Abanto said.

SB Corp. intends to expand the number of P3 Program beneficiaries by partnering with more conduits in local communities, or those who are already familiar with their clients.

“We’re going to see a quicker disbursement rate with locally based MFIs, and we’re going to expand the choice of conduits to include rural banks,” Abanto said, adding that the program can eventually cater to bigger enterprise-level borrowing when they tap rural banks as conduits.

With another P1 billion on the way, SB Corp. sees the need to expand its presence to monitor the funds. The agency intends to have one office per region to coordinate and expand the reach to local conduits.

“As we increase the number of local conduits, we plan to improve our ability to monitor and service operations of the national and local conduits. With more of these area offices and ideally depends on the size of the fund we’ll look after, hopefully we can have one per region,” Abanto said.

“We have to have a sufficient structure to deliver and manage a portfolio of P 1 billion on the average, that’s the vision,” he added.



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