LAGUA Proportionate Regulatory Policies for the MSME Secto

8/4/2019 LAGUA Proportionate Regulatory Policies for the MSME Secto

1/25

Version as of 24-06-2011.

Proportionate Regulatory Policiesfor the MSME Sector

BENEL P. LAGUAPresident and COO

Small Business Corporation

Philippines


2/25

Presentation Outline

1. Importance of MSME Sector2. Role of Government

3. General Practices on ProportionateRegulatory Policies4. The Philippine Response5. Policy Execution

6. Conclusion

*The views expressed herein are the authors and do not necessarilyreflect the position of the Small Business Corporation.


3/25

Importance of MSME Sector

The economic impact of MSMEs:

MSMEs make up 99.6% of total Philippineestablishments and makes the followingcontributions to the Philippine economy 61% of employment

32% of value-added 60% of exports

MSMEs are largely dependent on the banking system forfinancing

MSMEs are disadvantaged due to size, higher unittransaction cost, perceived risks, and financialinfrastructure distortions


4/25

The Role of Government in MSMEDevelopment

Facilitate MSMEs access to credit from formalinstitutions by:

Crafting policies that will allow for a

borderless credit access by MSMEs andensuring effective implementation of suchpolicies

Creating a regulatory environment for banksconducive to MSME lending

Capacitating both banks and MSMEs Absorbing some costs of programs aimed at

increasing MSMEs access to credit

Addressing market failure, leveling theplaying field


5/25

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 marketcapitalization

Reduce discrimination

Scale regulatory treatment


6/25

General Practices on Proportionate Policies[World Bank, CSBFA, RBI, SBA, CRA, CGAP]

Guarantee Schemes (more than half of all counties in the worldhave a guarantee program)

Directed Credit Programs

Interest Rate Subsidies

Regulatory Subsidies, e.g. lower provisioning

Regulations Concerning Documentation

Establishment of Credit Registries to address informationasymmetry

Priority Sector Lending, e.g. mandatory credit laws, PSL in India,Community Reinvestment Act in the USA


7/25

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 loanportfolio

Strengthened the Small Business Corporation, aspecialized financing and guarantee institution forMSMEs

2. Barangay Micro Business Enterprise (BMBE) Law (2002)

Provides income tax exemption, minimum wageexemption, and other benefits such as special creditwindow and other forms of assistance programs formicro enterprises


8/25

The Philippine Response

3. Credit Information System Act or CISA (2008) or RA 9510

Mandates the creation of a credit information bureau that willserve as a central registry of repository of credit informationincluding 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 SMELending

Capital requirements, loan documentation, risk weights

5. BSP Regulatory Framework on Microfinance:

Encouraged the establishment of microfinance-oriented banksand has a specialized microfinance regulatory unit. This allowednon-collateralized lending to the sector based on cash flow.


9/25

In theory, the Philippinesis adopting the menu of

proportionate regulatorypolicies.

What is the problem?


10/25

Policy Execution

1. 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 therequirements of the law, but at the margin especially inmicro and small8.5% vs. mandated 8.0%

Individual performance of banks reveal, however, that manybig 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 yearsNegative real growth is observed.

Moral Hazard problem; Penalty structure for non-complianceis cheap/uniform and biased against smaller banks


11/25

Policy Execution1. b) Magna Carta for MSMEs or RA 9501 (2008)

On SB Corporation

Self-sustaining. No government infusion in the past 19years. Declares Dividends.

No sovereign guarantee. Another GFI whose mainmandate is guarantee for (large) export firms has asovereign guarantee feature.

Limited capitalization when benchmarked againstguarantee corporations in Asia; multiple objectives.Recent increased capitalization remains in paper

Supervision not much different from standard prudentialsupervision of banks


12/25

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 bedirectly 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 underlyingeconomic impact of MSME programs (i.e taxes forgovernment, productivity, employment, income, economicgrowth, etc.)[Canada SBFA Report]


13/25

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 grantedto BMBEs)

3. Credit Information System Act or CISA (2008) or RA9510

Still awaiting full implementation after almost 3 yearsthat the law has been signed

Lack of funds to support the mandate, including thecreation of the credit information corporation


14/25

Policy Execution

4. a) Bangko Sentral ng Pilipinas (BSP) Regulations andCirculars on SME Lending

On Loan Documentation:

Requires the submission of BIR-submitted Income TaxReturn (ITR) upon loan application, including its waiverof confidentiality and its annual submission

Moratorium on submission granted for MSMEs, but toexpire in December 2011

After 2011, small business loans without documents tobe classified as especially mentioned

ITRs rarely reflect true condition of an enterprise. Shouldthe exemption be extended?


15/25

Policy Execution

4. b) Bangko Sentral ng Pilipinas (BSP) Regulations andCirculars on SME Lending

On loan classification

Reduced risk weight of MSME portfolio from 100% to75%

Subject to conditions like meeting certain prudentialnorms, including PDR of not more than 5% and a highlydiversified portfolio with not less than 500 accounts

Questions on appropriateness of conditional prudentialstandards to enjoy risk weight reduction benefit


16/25

Policy Execution

4. c) Bangko Sentral ng Pilipinas (BSP)Regulations and Circulars on SME Lending

On loan classification

Loans to exports to the extent guaranteed by SBCwith 20% risk weight

Loans to exporters to the extent guaranteed byGFSME with 0% risk weight so long as these areoutstanding upon merger

Loans to exporters guaranteed by SBC in post-merger as 20% risk weight though these may berenewals

Is the reduced risk weight sufficient incentive tobanks utilizing the guarantee?


17/25

Policy Execution

4. d) Bangko Sentral ng Pilipinas (BSP) Regulationsand Circulars on SME Lending

On unsecured loans

In theory, no technical prohibition for granting ofloans without collateral except for DOSRI limits

However, an unsecured loan for banks risk-basedCAR is a 100% risk weight on capital

Also, in the event the loan turns past due, loan lossprovisioning is immediately high

Not eligible for rediscounting

Effectively, there is disincentive to lending withoutcollateral


18/25

Policy Execution

4. e) Bangko Sentral ng Pilipinas (BSP)Regulations and Circulars on SME Lending

Supported the creation of independent CreditSurety Fund (CSF) set aside by LGUs

Provides guarantee which secures the loan ofMSMEs with local banks and facilitates lending

without collateral

CSFs are too small and without muscle; model isnot cognizant of how guarantee programs work


19/25

Policy Execution

4. f) Bangko Sentral ng Pilipinas (BSP) Regulations andCirculars on SME Lending

Reserve Requirements

PFIs of SB Corp are exempted from reserverequirements by BSP under SBC Wholesale LendingProgram, encouraging banks to expand their MSMEloan portfolio

However, BSP also runs its rediscounting window,sometimes at concessionary/subsidized rates, incompetition with GFIs wholesale lending programs


20/25

Policy Execution5. Bangko Sentral ng Pilipinas (BSP) Regulatory

Framework on Microfinance

Issuance of circulars governing the practice of

microfinance in the banking sectorrediscounting,recognition of microfinance (no collateral, loandocumentation), allow branching, etc.

Modified Manual of Examination

Promotion and Advocacy

Philippines cited by EIU as having the best overallregulatory environment for microfinance on banks.However, BSP does not cover NGOs and cooperatives.


21/25

Conclusion

Execution is opaque Implementing rules not following the spirit of basic

law Under-funded and undersized programsnot

commensurate to mandate; unwillingness to make theinvestment Inter-agency conflictapparent 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.


22/25

Conclusion

Government intervention by way ofproportionate regulatory action must:

Focus on reducing risks and transaction costsassociated with MSME lending

Balance the benefits of regulation/supervisionagainst the costs and risks of noregulation/supervision

Aim for consistency across stakeholders andinstitutions


23/25

Conclusion

Government intervention by way of proportionateregulatory 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


24/25

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 ofMicrofinance, INCITRAL Colloquium on Microfinance

4. Clinton, Lindsay (2010), India Journal: Whats Policy Got to Do With SocialEnterprise? (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, 20086. http://blogs.worldbank.org/allaboutfinance7. 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 CanadaThe 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, AFramework 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)
http://www.adb.org/Documents/Books/Central_Banks_Microfinance/Overview/chap_05.pdfhttp://www.adb.org/Documents/Books/Central_Banks_Microfinance/Overview/chap_05.pdfhttp://www.adb.org/Documents/Books/Central_Banks_Microfinance/Overview/chap_05.pdfhttp://www.adb.org/Documents/Books/Central_Banks_Microfinance/Overview/chap_05.pdfhttp://dsp-psd.pwgsc.gc.ca/collections/collection_2010/ic/Iu188-1-2009-eng.pdfhttp://dsp-psd.pwgsc.gc.ca/collections/collection_2010/ic/Iu188-1-2009-eng.pdfhttp://dsp-psd.pwgsc.gc.ca/collections/collection_2010/ic/Iu188-1-2009-eng.pdfhttp://dsp-psd.pwgsc.gc.ca/collections/collection_2010/ic/Iu188-1-2009-eng.pdfhttp://blogs.wsj.com/indiarealtime/2010/12/06/india-journal-whats-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/http://blogs.wsj.com/indiarealtime/2010/12/06/india-journal-whats-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/http://blogs.worldbank.org/allaboutfinancehttp://dnb.com.au/Header/News/Banking_on_SMEs/indexdl_7334.aspxhttp://www.philstar.com/Article.aspx?publicationSubCategoryId=66&articleId=697537http://www.tfmsl.ca/Documents/StephenSiboldPropReg.pdfhttp://www.tfmsl.ca/Documents/StephenSiboldPropReg.pdfhttp://www.pacificcommunityventures.org/insight/impactinvesting/report/12-Priority_Sector_Lending.pdfhttp://www.pacificcommunityventures.org/insight/impactinvesting/report/12-Priority_Sector_Lending.pdfhttp://www.pacificcommunityventures.org/insight/impactinvesting/report/12-Priority_Sector_Lending.pdfhttp://www.pacificcommunityventures.org/insight/impactinvesting/report/12-Priority_Sector_Lending.pdfhttp://en.wikipedia.org/wiki/Community_Reinvestment_Acthttp://en.wikipedia.org/wiki/Community_Reinvestment_Acthttp://en.wikipedia.org/wiki/Community_Reinvestment_Acthttp://www.pacificcommunityventures.org/insight/impactinvesting/report/12-Priority_Sector_Lending.pdfhttp://www.pacificcommunityventures.org/insight/impactinvesting/report/12-Priority_Sector_Lending.pdfhttp://www.pacificcommunityventures.org/insight/impactinvesting/report/12-Priority_Sector_Lending.pdfhttp://www.tfmsl.ca/Documents/StephenSiboldPropReg.pdfhttp://www.philstar.com/Article.aspx?publicationSubCategoryId=66&articleId=697537http://dnb.com.au/Header/News/Banking_on_SMEs/indexdl_7334.aspxhttp://blogs.worldbank.org/allaboutfinancehttp://blogs.wsj.com/indiarealtime/2010/12/06/india-journal-whats-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/http://blogs.wsj.com/indiarealtime/2010/12/06/india-journal-whats-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/http://blogs.wsj.com/indiarealtime/2010/12/06/india-journal-whats-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/http://blogs.wsj.com/indiarealtime/2010/12/06/india-journal-whats-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/http://blogs.wsj.com/indiarealtime/2010/12/06/india-journal-whats-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/http://blogs.wsj.com/indiarealtime/2010/12/06/india-journal-whats-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/http://blogs.wsj.com/indiarealtime/2010/12/06/india-journal-whats-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/http://blogs.wsj.com/indiarealtime/2010/12/06/india-journal-whats-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/http://blogs.wsj.com/indiarealtime/2010/12/06/india-journal-whats-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/http://blogs.wsj.com/indiarealtime/2010/12/06/india-journal-whats-policy-got-to-do-with-social-enterprise/http://dsp-psd.pwgsc.gc.ca/collections/collection_2010/ic/Iu188-1-2009-eng.pdfhttp://dsp-psd.pwgsc.gc.ca/collections/collection_2010/ic/Iu188-1-2009-eng.pdfhttp://dsp-psd.pwgsc.gc.ca/collections/collection_2010/ic/Iu188-1-2009-eng.pdfhttp://dsp-psd.pwgsc.gc.ca/collections/collection_2010/ic/Iu188-1-2009-eng.pdfhttp://dsp-psd.pwgsc.gc.ca/collections/collection_2010/ic/Iu188-1-2009-eng.pdfhttp://dsp-psd.pwgsc.gc.ca/collections/collection_2010/ic/Iu188-1-2009-eng.pdfhttp://dsp-psd.pwgsc.gc.ca/collections/collection_2010/ic/Iu188-1-2009-eng.pdfhttp://dsp-psd.pwgsc.gc.ca/collections/collection_2010/ic/Iu188-1-2009-eng.pdfhttp://dsp-psd.pwgsc.gc.ca/collections/collection_2010/ic/Iu188-1-2009-eng.pdfhttp://www.adb.org/Documents/Books/Central_Banks_Microfinance/Overview/chap_05.pdfhttp://www.adb.org/Documents/Books/Central_Banks_Microfinance/Overview/chap_05.pdf


25/25

END.

THANK YOU!!!

[email protected]

www.sbgfc.org.ph
mailto:[email protected]://www.sbgfc.org.ph/http://www.sbgfc.org.ph/mailto:[email protected]