version as of 24-06-2011. proportionate regulatory policies for the msme sector benel p. lagua...
TRANSCRIPT
Version as of 24-06-2011.
Proportionate Regulatory Policies for the MSME Sector
Proportionate Regulatory Policies for the MSME Sector
BENEL P. LAGUAPresident and COO
Small Business CorporationPhilippines
Presentation Outline
1. Importance of MSME Sector2. Role of Government3. General Practices on Proportionate
Regulatory Policies4. The Philippine Response5. Policy Execution6. Conclusion
*The views expressed herein are the author’s and do not necessarily reflect the position of the Small Business Corporation.
Importance of MSME Sector The economic impact of MSMEs:
MSMEs make up 99.6% of total Philippine establishments and makes the following contributions to the Philippine economy 61% of employment 32% of value-added 60% of exports
MSMEs are largely dependent on the banking system for financing
MSMEs are disadvantaged due to size, higher unit transaction cost, perceived risks, and financial infrastructure distortions
The Role of Government in MSME Development
Facilitate MSMEs’ access to credit from formal institutions by:
Crafting policies that will allow for a borderless credit access by MSMEs and ensuring effective implementation of such policies
Creating a regulatory environment for banks conducive to MSME lending
Capacitating both banks and MSMEs Absorbing some costs of programs aimed at
increasing MSMEs’ access to credit Addressing market failure, leveling the
playing field
Proportionate Policies
“One size does not fit all”
Regulation and supervision can be expensive to implement, and costly when it fails
Need for affirmative action and tiered regulation—
Differing regulatory requirements based on market capitalization
Reduce discrimination Scale regulatory treatment
General Practices on Proportionate Policies [World Bank, CSBFA, RBI, SBA, CRA, CGAP]
Guarantee Schemes (more than half of all counties in the world have a guarantee program)
Directed Credit Programs
Interest Rate Subsidies
Regulatory Subsidies, e.g. lower provisioning
Regulations Concerning Documentation
Establishment of Credit Registries to address information asymmetry
Priority Sector Lending, e.g. mandatory credit laws, PSL in India, Community Reinvestment Act in the USA
The Philippine Response
1. Magna Carta for MSMEs or RA 9501 (2008) Required that banks allot at least 8% for micro and
small and 2% for medium enterprise in their total loan portfolio
Strengthened the Small Business Corporation, a specialized financing and guarantee institution for MSMEs
2. Barangay Micro Business Enterprise (BMBE) Law (2002) Provides income tax exemption, minimum wage
exemption, and other benefits such as special credit window and other forms of assistance programs for micro enterprises
The Philippine Response3. Credit Information System Act or CISA (2008) or RA 9510
Mandates the creation of a credit information bureau that will serve as a central registry of repository of credit information including credit history and financial condition of borrowers
Promotes an efficient credit information system that will address financial institutions’ concerns on all their credit-related activities
4. Bangko Sentral ng Pilipinas (BSP) Regulations and Circulars on SME Lending
Capital requirements, loan documentation, risk weights
5. BSP Regulatory Framework on Microfinance: Encouraged the establishment of microfinance-oriented banks
and has a specialized microfinance regulatory unit. This allowed non-collateralized lending to the sector based on cash flow.
In theory, the Philippines is adopting the menu of
proportionate regulatory policies.
What is the problem?
Policy Execution1. a) Magna Carta for MSMEs or RA 9501 (2008)
On the mandatory credit allocation Compliance report too broad / Not transparent Overall, banking sector appear to be compliant with the
requirements of the law, but at the margin especially in micro and small—8.5% vs. mandated 8.0%
Individual performance of banks reveal, however, that many big banks remain under-complied
Some banks cover for the deficiency of other financial institutions
Lending figures to micro and small business sector is flat over the past 10 years—Negative real growth is observed.
Moral Hazard problem; Penalty structure for non-compliance is cheap/uniform and biased against smaller banks
Policy Execution1. b) Magna Carta for MSMEs or RA 9501 (2008)
On SB Corporation
Self-sustaining. No government infusion in the past 19 years. Declares Dividends.
No sovereign guarantee. Another GFI whose main mandate is guarantee for (large) export firms has a sovereign guarantee feature.
Limited capitalization when benchmarked against guarantee corporations in Asia; multiple objectives. Recent increased capitalization remains in paper
Supervision not much different from “standard” prudential supervision of banks
Policy Execution1. b) Magna Carta for MSMEs or RA 9501 (2008)
On SB Corporation
No clear appreciation of nature of guarantee corporation Costs incurred by the government in implementing MSME
financing programs (e.g credit guarantees) may not be directly recoverable using revenues per se as a measure
Full cost recovery could not be achieved without compromising the objective of facility finance to small business.
Cost-recovery can be measured through the underlying economic impact of MSME programs (i.e taxes for government, productivity, employment, income, economic growth, etc.)…[Canada SBFA Report]
Policy Execution
2. Barangay Micro Business Enterprise (BMBE) Law (2002)
Reluctance from executing agencies (i.e DOF and LGUs concerned about losses due to tax exemption granted to BMBEs)
3. Credit Information System Act or CISA (2008) or RA 9510
Still awaiting full implementation after almost 3 years that the law has been signed
Lack of funds to support the mandate, including the creation of the credit information corporation
Policy Execution
4. a) Bangko Sentral ng Pilipinas (BSP) Regulations and Circulars on SME Lending
On Loan Documentation:
Requires the submission of BIR-submitted Income Tax Return (ITR) upon loan application, including its waiver of confidentiality and its annual submission
Moratorium on submission granted for MSMEs, but to expire in December 2011
After 2011, small business loans without documents to be classified as “especially mentioned”
ITRs rarely reflect true condition of an enterprise. Should the exemption be extended?
Policy Execution4. b) Bangko Sentral ng Pilipinas (BSP) Regulations and
Circulars on SME Lending
On loan classification
Reduced risk weight of MSME portfolio from 100% to 75%
Subject to conditions like meeting certain prudential norms, including PDR of not more than 5% and a highly diversified portfolio with not less than 500 accounts
Questions on appropriateness of conditional prudential standards to enjoy risk weight reduction benefit
Policy Execution4. c) Bangko Sentral ng Pilipinas (BSP)
Regulations and Circulars on SME Lending
On loan classification
Loans to exports to the extent guaranteed by SBC with 20% risk weight
Loans to exporters to the extent guaranteed by GFSME with 0% risk weight so long as these are outstanding upon merger
Loans to exporters guaranteed by SBC in post-merger as 20% risk weight though these may be renewals
Is the reduced risk weight sufficient incentive to banks utilizing the guarantee?
Policy Execution4. d) Bangko Sentral ng Pilipinas (BSP) Regulations and
Circulars on SME Lending
On unsecured loans
In theory, no technical prohibition for granting of loans without collateral except for DOSRI limits
However, an unsecured loan for banks’ risk-based CAR is a 100% risk weight on capital
Also, in the event the loan turns past due, loan loss provisioning is immediately high
Not eligible for rediscounting Effectively, there is disincentive to lending without
collateral
Policy Execution4. e) Bangko Sentral ng Pilipinas (BSP)
Regulations and Circulars on SME Lending
Supported the creation of independent Credit Surety Fund (CSF) set aside by LGUs
Provides guarantee which secures the loan of MSMEs with local banks and facilitates lending without collateral
CSFs are too small and without muscle; model is not cognizant of how guarantee programs work
Policy Execution4. f) Bangko Sentral ng Pilipinas (BSP) Regulations and
Circulars on SME Lending
Reserve Requirements
PFIs of SB Corp are exempted from reserve requirements by BSP under SBC Wholesale Lending Program, encouraging banks to expand their MSME loan portfolio
However, BSP also runs its rediscounting window, sometimes at concessionary/subsidized rates, in competition with GFIs’ wholesale lending programs
Policy Execution5. Bangko Sentral ng Pilipinas (BSP) Regulatory
Framework on Microfinance
Issuance of circulars governing the practice of microfinance in the banking sector—rediscounting, recognition of microfinance (no collateral, loan documentation), allow branching, etc.
Modified Manual of Examination Promotion and Advocacy Philippines cited by EIU as having the best overall
regulatory environment for microfinance on banks. However, BSP does not cover NGOs and cooperatives.
Conclusion
Execution is opaque Implementing rules not following the spirit of basic law Under-funded and undersized programs—not
commensurate to mandate; unwillingness to make the investment
Inter-agency conflict—apparent weakness in coordination
Business model inconsistent with program objectives Costs and benefits of some proportionate regulatory
schemes not well-measured Objectives are at cross-purpose Major changes in Microfinance; Uneven policy
execution in SME Finance.
Conclusion
Government intervention by way of proportionate regulatory action must:
Focus on reducing risks and transaction costs associated with MSME lending
Balance the benefits of regulation/supervision against the costs and risks of no regulation/supervision
Aim for consistency across stakeholders and institutions
Conclusion
Government intervention by way of proportionate regulatory action must:
Serve as co-investor, thus, a source of risk capital
Educate private capital on how to lend to SME (capacity building)
Channel capital in strategic directions
Be designed for effective implementation, execution, and enforcement
Be “enlightened”
References1. ADB (2000), “The Role of Central Banks in Asia and the Pacific: Overview” (
http://www.adb.org/Documents/Books/Central_Banks_Microfinance/Overview/chap_05.pdf)
2. Canada Small Business Financing Act (2009), “Comprehensive Review Report 2004-2009),” [ http://dsp-psd.pwgsc.gc.ca/collections/collection_2010/ic/Iu188-1-2009-eng.pdf ]
3. CGAP (2011), “Recommendations for Proportionate Regulation and Supervision of Microfinance,” INCITRAL Colloquium on Microfinance
4. Clinton, Lindsay (2010), “India Journal: What’s Policy Got to Do With Social Enterprise?” (http://blogs.wsj.com/indiarealtime/2010/12/06/india-journal-whats-policy-got-to-do-with-social-enterprise/)
5. Fan, Qimiao (The World Bank), Presentation during the “Workshop on Improving Access to Finance for SMEs in Asia-Pacific Region, June 16-17, 2008
6. http://blogs.worldbank.org/allaboutfinance 7. http://dnb.com.au/Header/News/Banking_on_SMEs/indexdl_7334.aspx8. http://www.philstar.com/Article.aspx?publicationSubCategoryId=66&articleId=6975379. Sibold, S. (2005), “Addressing the Burden of Regulation in Canada—The Case for
Proportionate Regulation,” (http://www.tfmsl.ca/Documents/StephenSiboldPropReg.pdf)10. Thornley, B. et al (2011), “Case 12: Priority Sector Lending,” in Impact Investing, A
Framework for Policy Design and Analysis (http://www.pacificcommunityventures.org/insight/impactinvesting/report/12-Priority_Sector_Lending.pdf)
11. Wikipedia, Community Reinvestment Act (http://en.wikipedia.org/wiki/Community_Reinvestment_Act)