Risk Management of Small and Medium-Sized Enterprise Lending - Ingrid van Wees

Opening remarks by Ingrid van Wees, ADB Vice-President for Finance and Risk Management, at the 19th Regional Workshop on Risk Management of Small and Medium-Sized Enterprise Lending, 21 July 2021

Distinguished speaker, Dr. Bruce Tolentino, ladies and gentlemen:

A very good afternoon.

On behalf of the Asian Development Bank, I warmly welcome you to the 19th Regional Workshop on Risk Management of Small and Medium-Sized Enterprise Lending; the first in a virtual format.

ADB is very grateful to host this workshop jointly with the Bangko Sentral ng Pilipinas, or BSP.

I am particularly thrilled that of the 93 rural bank representatives from different regions of the Philippines, 75% are female—the highest female participation rate so far for this Workshop series.

This afternoon, I wish to touch upon three areas: first, the importance of micro, small and medium enterprises (or MSMEs) and the rural banks in Philippines’ economic development; second, the challenges met by MSMEs as a result of the ongoing COVID-19 pandemic; and finally, how ADB has been a partner in supporting financial inclusion and overcoming pandemic challenges in the Philippines.

Philippine MSMEs’ challenges and the role of rural banks

The dynamism of MSMEs and entrepreneurship is a key underpinning for productivity enhancement, competitiveness, and inclusive growth globally. MSMEs play a significant role in the Philippines’ economy and in fulfilling the “Zero to Ten-point Socio-economic Agenda” towards the national long-term vision “AmBisyon Natin 2040”. They comprise 99.5% of the total number of Filipino enterprises, providing 63% of Philippines employment, and account for 36% of GDP.

However, their growth remains curtailed by limited access to affordable financing and financial products that suit their needs. Banks typically prioritize larger corporate borrowers because of perception of lower credit risk, higher repayment rates, and the availability of collateral. Collateral requirements are high, averaging 114% of the value of the loan for small enterprises and 191% for medium sized enterprises in the Philippines.

In contrast, rural banks are important lenders to local entrepreneurs and MSMEs. Albeit holding less than 2% of total Philippines’ banks’ asset at around PHP 280 billion, rural banks foster financial inclusion through their strong geographical presence. With MSMEs as their core market segment, rural banks consistently exceed the requirements of the Philippines’ Magna Carta for MSMEs, a landmark legislation, which requires banks to maintain a minimum share of 10% of their loan portfolio to MSMEs.

I would like to commend the BSP for recognizing rural banks’ critical role in expanding financial services in rural and agricultural communities and launching the Rural Banking Industry Strengthening Program (RBSP), led by you, Dr. Tolentino in an effort to boost their resilience. 

The COVID-19 impact

From the outset of the COVID-19 pandemic and the ensuing limitations to mobility, MSMEs in the Philippines are hit among the hardest.

To date, the majority of MSMEs are entrenched in the analog manner of conducting business and are vulnerable to supply chain disruptions without any business continuity plans in place in the face of emergencies. An enterprise survey conducted by ADB revealed major problems experienced by MSMEs during the pandemic. Cash flow constraints – as reported by as much as 78% of MSMEs in the second half of 2020 – resulted in increased indebtedness, difficulties in covering overhead cost, as well as supply chain interruptions. More than 60% of MSMEs temporarily closed their business during the Enhanced Community Quarantine (ECQ) period. Associated containment measures triggered a sharp decline in business activity and revenues. This led to a heightened reluctance of banks to extend credit due to concerns of rising nonperforming loans. To survive, 80% of Filipino MSMEs relied upon retained earnings or personal loans since the onset of the pandemic.  While 16% of MSMEs applied for bank loans, only 4.8% received approval. High on the MSME’s list of concerns are a lack of working capital and difficulty in loan repayments.

The determined and swift relief measures by BSP were crucial to mitigate adverse impacts of the pandemic on MSMEs. To further incentivize bank lending to businesses affected by severe economic disruptions, the BSP allowed alternative modes of compliance with reserve requirements, whereby loans granted to MSMEs would be eligible as a form of alternative compliance with reserve requirements. 

In Q1 2021, rural and cooperative banks allocated 35% of their total loan portfolios to MSMEs, more than three times than the mandated allocation and an increase from 22% in the first half of 2018, pre-COVID. Overall banks’ non-performing loans increased to 3.6 percent in December 2020. While this was the highest gross NPL ratio since the 3.48 percent recorded in January 2013, we consider it as manageable as it is still much lower than the double-digit levels recorded during the Asian Financial Crisis.

A silver lining - Digitalization for financial inclusion

A silver lining amongst the storm clouds is the considerable acceleration of the Philippine’s transformation into the digital economy as a result of the pandemic reflected by the sixfold increase of real-time digital payment transactions in 2020 compared to 2019.

Recognizing that social distancing and online transactions will likely be part of the new normal, the Philippine Government updated its Development Plan 2017-2022 in 2021 and calls achieving a cash-lite economy.

I congratulate the BSP for improving the country’s digital and financial infrastructure by addressing risks and cost issues that have made lending to MSMEs a high-risk and low-margin proposition as well as for advocating the passage of critical legislations for market-enabling infrastructure.

ADB as a key partner 

ADB has been a key development partner to the Philippines and the BSP in the journey towards wider financial inclusion and accelerated digitalization of rural banks.

To date, ADB approved over $26.4 billion in financial and technical assistance.  ADB’s support to the Philippines reached a record high of $4.2 billion in 2020, with approvals of countercyclical support, policy-based loans to support infrastructure financing generated by capital markets, expand financial inclusion, and raise the agriculture sector’s productivity and competitiveness.

With two $300-million subprograms approved in 2018 and 2020, ADB’s “Inclusive Finance Development Program” is supporting reforms to help the Philippine government reach targets linked to the National Strategy for Financial Inclusion. These measures will strengthen the institutional and policy environment for financial inclusion, improve financial infrastructure, and increase the capacity and reach of service providers, especially rural banks and non-bank financial institutions. The program aligns ADB assistance with key government reform programs over the medium-to long term, to support increased access to financial products and services as part of an inclusive economic growth agenda.

ADB also assisted individual Filipino banks in their digitalization efforts in partnership with the BSP. Allow me to highlight our support to Cantilan Bank since 2017 to conduct a pilot study on cloud-based core banking technology. The pilot was also supported by the BSP through its regulatory sandbox program. By January 2019, Cantilan Bank became the first BSP-regulated rural bank in the Philippines to fully rely on a cloud-based core banking system, resulting in a more efficient and flexible way of doing business. The transition is expected to support cutting costs, improving customer services, and, in turn, drawing more people into the formal financial system. As a result of the successful pilot and active support from the BSP as the regulatory body, ADB is developing a framework for a matching grant technology fund to enable other banks to use fintech to further financial inclusion of underserved and unbanked groups in the Philippines. I am pleased to share that you will learn more about this success story on day 6 of this virtual workshop.

BSP’s partnership with ADB is stronger than ever. Through ADB’s technical assistance “Financial Inclusion Framework Strengthening”, the BSP is implementing a pilot project to demonstrate the viability of agriculture value chains and encourage their financing. Beneficiaries of this initiative will be MSMEs in the agricultural sector.

The collaboration of our institutions to strengthen rural banks’ risk management practices through this workshop could not be timelier. It is especially important during the ongoing pandemic.

Going forward, ADB will continue to explore new ways and support introduction of new financial technology solutions to address financial exclusion in close collaboration with you, our partners.

Expected workshop outcomes

Ladies and gentlemen,

Over the next six afternoons, you will receive practical tips on how to formulate credit policy, assess loan applications, and monitor loan portfolios more effectively.  You will learn through hands-on case studies and from each other’s knowledge sharing.

With your active participation, you will help build capacity of your rural bank in better serving the financing needs of individual entrepreneurs and small-scale business. I am confident that the dialogue and exchange that starts here today, will not end and that you will continue interacting and learning from each other after the workshop’s closure.

I hope, through this training you may truly adopt prudent risk management measure to avoid the pitfalls of hasty credit decisions – “Ang lumalakad nang matulin, kung matinik ay malalim” – “Thorns bury deeply into one who walks hastily”.

It takes the ingenuity and creativity of all Filipinos, female and male, to achieve prosperous, inclusive, resilient and sustainable growth.

In closing, I would like to thank you, Dr. Tolentino, for the keynote speech and the BSP for our strong partnership.

Wish you all a productive and successful workshop. In the meantime, please stay safe and healthy where you are.

 

 
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