Now on second reading in the Senate is Senate Bill 1450, known as The Financial Inclusion Act/Personal Property Act, which had already passed third reading in the Lower House under House Bill 6907.
One of the three Cs missing in granting credit to borrowers in the Philippines is the issue of “collateral.” It is not its absence but the lack of bank appreciation of certain types of collateral, given the existing legal framework and ambiguity with respect to their comfortable valuation to suit the risk appetite of lenders.
Banks currently would prefer land and other “hard assets” as collateral. Thus, many micro, small and medium enterprises (MSMEs) are forced to go to the informal “5-6” usurers—thus, impeding their growth. Statistics also bear out that the Philippines is one of the countries with the highest ratio of business owners borrowing capital from relatives and friends—sometimes destroying precious relationships in the collection process.
On the other hand, the Agri-Agra law, which mandates banks to allot 25 percent of their total loan portfolio to agriculture, is observed more on the breach with banks opting to pay billions in penalties to avoid compliance. Is this bill one of the ways out of this fix?
The bill essentially allows the acceptability of “movable assets and personal properties” as collateral. Key to this is the establishment of the common electronic registry through the Land Registration Authority (LRA) of all such collateral, allowing for more transparency, less legal hitches in foreclosure and disposition of assets and does away with the expensive and tedious process of booking such collateral.
Effectively, the bill looks at the following collateral as considerations for lending: inventories, account receivables, future receivables, crops, machinery and equipment, warehouse receipts, intellectual property and other personal property.
The process precludes the same due diligence on the borrower per se and the possible loan value of such collateral, which is always addressed by the sound judgment of astute bankers. But in the end—the ability of the banks to change their mind-set and accept the spirit of the bill will enable them to diversify earning assets (into healthy MSMEs) and their risks (geographically and industry wise), as well as broaden their collateral-mix.
According to Gay Gloria-Santos of the International Finance Corp. (IFC) of The World Bank Group (which is acting as adviser to this bill), this has gotten full endorsement from major government institutions, such as the Bangko Sentral ng Pilipinas (BSP), the Department of Finance (DOF), Department of Trade and Industry, Securities and Exchange Commission and the LRA. From the private sector, the Bankers Association of the Philippines (BAP), the Association of Rural Banks and the “Go Negosyo.”
Gil S. Beltran, undersecretary of the DOF said, “the bill aligns well with the 10-point government socioeconomic agenda on economic competitiveness and enhances the ease of doing business, especially on the Legal Registration Index.”
If passed into law, it shall have created a mechanism to perfect the establishment of security interests of lenders in movable assets and other personal properties.
A change in the mind-set of banks is also needed, though they have expressed support for the bill—as this will create a new market for loans—which will also reduce their needless over-liquidity and improve their returns compared to their reliance on low-yielding, but perhaps, less risky instruments.
One might consider egging the BSP to convert the Agri-Agra law allocation into this facility to cover this bill rather than just a lone industry like agriculture. Besides, Nestor Tan, president of the BAP, earlier told Finex that the 25-percent (of portfolio) mandated allocation to agricultural is far more than the total productive financial needs of the industry.
Moreover, IFC’s Santos sees this as one of the first moves to enthuse Filipinos to borrow within the formal credit system rather than rely on tenuous relatives’ support and the usurious unregistered lenders.
Of course, there is no false prophecy to say the bill is the lone silver bullet that will emancipate the MSMEs and micro businessmen from underdevelopment and engender greater prosperity but it could be a law that can be implementable—and useful—six months after approval.
In six months, the electronic registry could be set up, for instance.
There are other evolving bills, as well, like the Ease of Doing Business, which is more comprehensive but could take more time. The national identification law is good for the un-banked community and improves all the institutions’ need to KYC (know your customer).
The land-classification bill will free many of the unresolved conflict points in identifying the land for collateral and commercial needs. One can look at this ambiguity as, perhaps, the reason banks to this day are generally averse to taking in agricultural land as collateral.
It is a tragedy when one considers that we are, largely, an agricultural country and partly explains, perhaps, why our agricultural sector, thinly capitalized and deprived of banking support, languishes as a contributor of a mere 13 percent of the gross national product.
Among those fashioned to help financial inclusion, this bill of financial inclusion appears to be the one having immediate and robust impact on the economy, in general, and the MSME’s practitioners, in particular. We urge the Senate to prioritize in making the bill into law.
Dejaresco, a former banker, is a financial consultant, media practitioner and book author. He is a life member and the chairman of Broadcast Media of Finex. But his views here are personal and do not necessarily reflect those of Finex.