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					Proportionate Regulatory Policies
      for the MSME Sector

         BENEL P. LAGUA
          President and COO
       Small Business Corporation
               Philippines




              Version as of 24-06-2011.
Presentation Outline

1. Importance of MSME Sector
2. Role of Government
3. General Practices on Proportionate
   Regulatory Policies
4. The Philippine Response
5. Policy Execution
6. 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 Response
3.    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 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 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 Execution
1. 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 Execution
1. 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 Execution
4.   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 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 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 Execution
4.   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 Execution
4. 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 Execution
4.   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 Execution
5.   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”
References
1.    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.aspx
8.    http://www.philstar.com/Article.aspx?publicationSubCategoryId=66&articleId=697537
9.    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)
       END.

 THANK YOU!!!



blagua@sbgfc.org.ph

 www.sbgfc.org.ph

				
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