TO LEND OR NOT TO LEND

The Philippine Star
05/04/09

It's been about six months since we last heard about the Credit Information System Act (CISA), which President Arroyo signed into law in October last year. The passage of this law is hailed as a major step towards unlocking money for lending especially to small and medium business enterprises, and to help lenders improve their ability to assess risks.

The law seeks to establish a centralized system for credit history monitoring, which is deemed crucial in making credit more available to micro, small and medium enterprises (MSMEs).

The law is supposed to work by requiring all banks, quasi-banks, their affiliates and subsidiaries – including insurance companies, credit card companies and other entities providing credit – to submit data as well as updates on the borrowers' credit performance, whether positive or negative, at the moment of a loan application.

More than helping to minimize operational costs of creditors, the law should reduce any risk of loan defaults since it provides a detailed credit history of borrowers. Its enactment, as the central bank has pointed out, could not have come at a better time given the volatility of the credit market during this period of uncertainty.

Slow acting SEC

There is no debating just how urgent this piece of legislation is, and why it must be implemented as soon as possible. Unfortunately, things seem to be moving slowly, especially with the Securities and Exchange Commission, the lead government agency tasked to enforce the provisions of the CISA.

We also have no idea when the Credit Information Corp., a requirement of the new law, will be set up to perform the task of gathering and consolidating credit data that financial institutions will need when requesting for a borrower's track record.

Reluctance to lend

In the meantime, a central bank official was recently quoted as saying that banks have started loosening their lending standards with signs of the financial crisis bottoming out and the domestic economy beginning to recover.

In the absence of hard facts and figures to back it up, this appears to be more a product of wishful thinking. But then, let’s hope he’s right.
While bankers say they intend to keep their lending windows open despite the economic slowdown, they are not exactly ecstatic about lending. Understandably, banks want to limit their exposure to risks by extending loans only to a few most credit-worthy borrowers – which really excludes just about everyone except true blue-chip companies.

Bad loans rising

It is, of course, reassuring to hear Bangko Sentral ng Pilipinas officials saying that our banking system remains fundamentally strong, and that it continues to do everything to encourage lending while keeping a sharp lookout on risks.

Offhand, it appears that local lenders – particularly the big boys or the universal and commercial banks – have managed to keep the ratio of their non-performing loans at below 5 percent of total loans in recent months. The ratio stood at 3.82 percent as of end-January.

In absolute numbers, however, BSP data showed that the industry's bad loans increasing to P90.84 billion from P88.19 billion in December. The latest figures also showed that while bank lending continued to grow in February – by 22.5 percent from a year ago – loans for both production activities and household consumption purposes rose at slower rates.

Loans for production activities rose 20.0 percent in February compared to 22.0 percent in the previous month. Growth in consumption loans decelerated to 15.2 percent from 16.4 percent in January, pulled down by the slowdown in the growth of credit card loans to 14.7 percent in February from 17.2 percent in the previous month.

MSMEs access to credit

If there is any money changing hand these days, more likely it is going to such big companies such as Philippine Long Distance Telephone Co., San Miguel Corp. and the Ayala companies. Definitely, nothing as dramatic is happening to the MSME sector.

Under a BSP circular issued last year, banks shall for a period of 10 years until 2018 allocate at least 8 percent of their total loan portfolio for micro and small enterprises, and 2 percent for medium enterprises.

The amount is not enough to meet the funding needs of MSMEs especially in these trying times, but the biggest issue is still whether MSMEs are borrowing or are able to borrow from the banks.

Because of smaller capitalization and limited access to credit, small and medium enterprises in developing countries like the Philippines are being hit hard by the global financial crisis, according to a recent study by the International Labor Organization.

Nothing much is being done to correct the tightness of credit especially for MSMEs – even with a law that had been signed six months ago. Dare we ask if the authorities have again failed – or forgot – to implement an important and timely piece of legislation such as the CISA?

Timely implementation

Making the law work, I believe, is even more urgent with the Philippine economy now projected by the International Monetary Fund to post zero growth this year as the Fund's latest projection shows a deeper 1.5-percent contraction of the world economy in 2009. A number of economists also expressed the view that the global financial crisis may be around much longer than had originally been seen.

These, indeed, are extraordinary times. We need to see more proactive approaches to the crisis. It is not enough that the government adjusts spending plans to boost growth. There are other ways to spur economic activities.

BSP has moved to stimulate the economy with its successive interest rate cuts in a bid to boost liquidity in the financial system. A good supplement to BSP’s initiative is the immediate and effective implementation of the CISA law. borrowers. Small but deserving businesses, the MSMEs, should be given the chance to avail of credit – the lifeblood that keeps the economy afloat.

Should you wish to share any insights, write me at Link Edge, 25th Floor, 139 Corporate Center, Valero Street, SalcedoVillage, 1227 MakatiCity. Or e-mail me at reydgamboa@yahoo.com. For a compilation of previous articles, visit www.BizlinksPhilippines.net.