The Philippine banking system, despite being relatively small compared to its regional counterparts, has been repeatedly assessed by local and international analysts as among the most resilient globally in recent years.
The Bangko Sentral ng Pilipinas (BSP) and international credit watchers largely owed the lending industry’s recent strength to a carefully calibrated regulatory regime, one that largely made the shift from a “mandatory” regime to a more “enabling” regime.
At a recent speaking engagement, BSP Deputy Governor for the Supervision and Examination Sector Chuchi Fonacier said since 2005, the country’s central monetary authority has transitioned from compliance-based to a risk-based regulatory approach.
“We learned that the best regulatory approach remains to be one that is ‘enabling’—flexible and risk-based; providing guidelines rather than mandates; considering banks’ risk appetites and business models and applying standards proportionate to the size, structure and complexity of their operations,” Fonacier said.
While banks and other sectors, at large, remain key beneficiaries to these new monitoring and regulatory system of the BSP, the long-overdue reforms on the mandated lending to the agriculture sector and micro, small and medium enterprise (MSME) have yet to come. The good thing is the banking system continues to reap the benefits of a new and calibrated credit program.
The mandated lending to agriculture and agrarian reform, known as the Agri-Agra Reform Credit Act of 2009, requires banks to allocate 25 percent of their total loan portfolio to the two sectors—10 percent for agrarian-reform credit and 15 percent to other agricultural credit.
The MSME sector also has a credit benefit on its way, as the law requires banks to set aside another tenth of their total loan portfolio to MSME lending.
Should local lenders—big or small—fail to meet the quota, they will be subject to monetary fines and penalties.
However, for years, banks have chosen to pay the monetary penalty instead of complying with the mandatory lending to these sectors, as banks, especially those unfamiliar with MSME or agricultural clients, would rather pay the fixed fine instead of facing the many risks of lending to unknown territory.
In the third quarter of 2017, for example, rural and cooperative banks, whose primary market is the countryside, were able to exceed the 10-percent mandate with a total compliance of 13.09 percent. Universal and commercial banks, on the other hand, only have a 0.77-percent compliance rate.
The trend is similar to the agricultural credit mandate, where rural and cooperative banks exceed the mandate of 15 percent to hit 26.68 percent, while universal and commercial banks, while making the cut, were only at 12.69 percent.
Fonacier told the BusinessMirror that despite calls from the BSP to lawmakers to amend the mandatory credit laws, these remain unchanged and are still in effect for the year.
Asked on what kind of provisions the BSP deems fit should these mandated laws actually be amended, Fonacier said: “Lending to agri-agra should have a guarantee mechanism in place and also an insurance component.”