Enhancing the Philippine Credit Guarantee Program for MSMEs

Transcription

1 Enhancing the Philippine Credit Guarantee Program for MSMEs Presented by: BENEL P. LAGUA President and COO Presented During the Workshop on SME Credit Guarantees in Asia-Pacific Region June 16-18, Hangzhou, China

2 Presentation Outline: 1. Overview of the Philippines and Its MSME Sector 2. RA 9501: Magna Carta for MSMEs 3. Small Business Corporation s (SBC) Credit Delivery Strategy and Summary of Operations 4. Lesson from Studies on CGCs 5. SBC s Credit Guarantee Program: Goals, Strengths, and Weaknesses 6. Credit Guarantee System in Asian Counterparts 7. Obstacles in the Development of an Effective Credit Guarantee System in the Philippines 8. Conclusion and Recommendations

3 Overview of the Philippines Geography: Located at Southeastern Asia, between the Philippine Sea and South China Sea, East of Vietnam An archipelago composed of 7,107 islands People: Population (1 st Quarter 2010) is estimated at 93.3 million Government: Republic of the Philippines New Administration by end-june 2010 under President-elect Benigno Simeon C. Aquino III Economy as of 1 st Quarter 2010 (source: NSO) GDP Growth: 7.3% (from 2009 s 0.5%) Per Capita GDP Growth: 5.3% Per Capita GDP: P20,743 GNP Growth: 9.5% (from 2009 s 3.3%) Per Capita GNP Growth: 7.4% Per Capita GNP: P23,992 Inflation rate: 3.85%

4 Overview of Philippine MSME Sector Tool for poverty alleviation through employment opportunities for the poor Comprise 99.6% of all registered businesses Employ 70% of total t labor force Contribute 32% to GDP Mainly domestic-oriented Account for 60% of Philippine exports

5 Overview of Philippine MSME Sector Access to finance commonly pointed out as major obstacle to growth and development due to: High transaction cost of small loans Perception of high risk of MSME lending Lack of traditional collateral demanded by banks Perception of low profitability of SME lending

6 RA 9501: Magna Carta for MSMEs Magna Carta for MSMEs RA 6977, as amended by RA 9501 in 2008 Magna Carta for SEs RA 6977 as amended by RA 8289 in 1997

7 RA 9501: Magna Carta for MSMEs (2008) Definition iti of MSMEs Micro: Not more than P3,000,000 Small: P3,000,001 to P15,000,000 Medium: P15,000,001 to P100,000,000 Mandatory Allocation for MSMEs At least 8% for micro and small enterprises and at least 2% for medium enterprises of the total loan portfolio of all public and private banks as defined under BSP rules Coverage: 10 years from the date of effectivity of the amendatory act Amended Charter of the Small Business Corporation (also known as Amended Charter of the Small Business Corporation (also known as the Small Business Guarantee and Finance Corporation)

8 SBC and Its Credit Delivery Strategy A creation of RA 6977 in January 1991 Primary responsibility of implementing comprehensive policies and programs to assist MSMEs in all areas, including but not limited to finance and information services; training and marketing. (Sec. 11) Commenced operation on July 16, 1992 Me ge of the SBGFC nd the G ntee F nd fo SME Merger of the SBGFC and the Guarantee Fund for SME (GFSME) through EO No. 28 in November 2001

9 Overview of Philippine Credit Guarantee Systems Philippines GFSME (Guarantee Fund for SME) in (Precursor of SBC) Initial capital of P300 M in 1984 (Seed Fund) Cumulative Guarantee Approval of P6.17 B for 2,364 accounts Total Guarantee Payments is P248 M Dividends paid to Mother Corporation if P346 M Fund balance as of end-2009 is P931 M

10 SBC and Its Credit Delivery Strategy Vision: The champion for a globally competitive and viable MSME sector.

11 SBC and Its Credit Delivery Strategy Mission: Develop elo and provide financial services and capacity building programs in a progressive and sustainable manner to empower MSMEs as viable businesses.

12 SBC and Its Credit Delivery Strategy Classification i of MSME Borrower: One size not for all Start-up: newly established enterprise with no credit / business track record Graduation Micro: economically active; willing to register as an enterprise; track record of at least one year; credit track record with an MFI; with some tangible business assets Pre-Bankable: limited it business track record and size; limited it mgt. systems; absence of or negative credit track record; absence of or inferior collateral Near-Bankable: substantial business track record and size; established mgt. systems Bankable

13 SBC and Its Credit Delivery Strategy: The Incubation-Graduation Model Near Bankable SMEs Bankable SMEs Start- Up Micros Graduating Micros Pre- Bankable but Viable MSMEs With MFI capability building support Pre-Enterprise Micros With enterprise registration support Wholesale Micro-Finance Direct Lending for MSMEs Cedit Credit Guarantees for SMEs Wholesale Lending for SMEs

14 SME Wholesale Lending 18,000 16,000 14,451 15,834 16,100 14,000 12,086 in millio on pesos s 12,000 10,000 8,000 6,000 4,413 6,871 9,602 4,000 2, , Year

15 Microfinance Wholesale in mill lion pes sos 4,000 3,500 3,000 2,500 2,000 1,500 1, ,307 3,406 2,239 1, Year

16 MSME Retail Lending in mil llion pes sos 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1, , ,609 3,968 4, Year

17 Credit Guarantees in mil llion pes sos 2, ,800 1,600 1,400 1,200 1, ,224 1, ,603 1,686 1, Year

18 Lending Performance by Lending Facility Microfinance 13% Guarantees 7% Retail 16% Wholesale 64%

19 Has over 3,000 MSME clients, over 100 partner financial institutions, and serving 65 of the 81 provinces across the country

20 SBC s Performance Indicators Assets Retained Earnings Cumulative EBIT ( ) Dividends paid (since 1991) P2.05 billion P4.90 billion P million P million P million P million

21 Studies on Credit Guarantee Schemes (ADB, 2006; Levitsky, 1997) 85 countries operate credit guarantee schemes 23 in OECD countries 62 in developing countries (11 in Asia) From 67 of these funds (70% government organizations; 24% private; the rest, mutuals or cooperatives): 70% operated on a funded basis 30% had their costs met by a direct spending commitment t from government budget Proportion of funded schemes are much higher for developed than developing world Main guarantees in East Asian countries have been in operation for over 30 years (ex. Japan since 1947, Korea since 1971, Indonesia since 1972, and Malaysia since 1971) ACSIC- Asian Credit Supplementation Institutions Confederation, composed of CGCs in Japan, Korea, Malaysia, Philippines, Indonesia, India, Taiwan, Thailand, Sri Lanka, and Nepal.

22 Lessons from Studies on CGC s Mixed results in terms of failure and success of guarantee schemes. These provide valuable lessons for existing, operating guarantee systems. Even the more successful models, i.e. USA, Canada, only operate on a break-even basis. In developing countries, funded schemes are more attractive to lending institutions. Size matters Funds corpus investment income together with generated fees to cover administrative expense Most loan guarantees involve some form of subsidies, but additionality more than compensate for these.

23 Lessons from Studies on CGC s Substantial ti volume of guarantees should create interest t income that t will protect guarantee fund from being decapitalized to avoid further subsidies from government. Ideal leverage (ratio of guarantees outstanding to capital value of fund) for funded schemes: Leverage of 2 or 3 to 1 in 3 years from start of operation Leverage of 5 to 1 in 5 years After 10 years, it should exceed 7 or 8 to 1 Credit guarantee schemes should be open to at least several competing commercial banks that are considered financially sound, adequately staffed, and have reasonable loan portfolio levels.

24 Lessons from Studies on CGC s Sample checks on additionality should be made every 2 years. Not less than 60% should be additional. Ideal is 80-90%, otherwise, appropriate actions should be taken. Target groups of schemes should be formal SMEs, with only a small minority of start-ups. Appropriate range for guarantee in liberalized market is 60%-80% Collateral offered by the borrower should be taken and Collateral offered by the borrower should be taken and the guarantee contract preferably used to cover collateral shortfall.

25 Lessons from Studies on CGC s Loan guarantees have a more benign effect on financial i market performance than providing lenders with cheap, subsidized funds. Awareness about moral hazard an important lesson Banks and borrowers may have less incentive to monitor and repay loans Well-designed and implemented schemes can control costs and lead to long-term benefits Guarantor has a role as a third-party risk sharer and facilitator Guarantees will not make bad borrowers bankable, and will not make bad banks lend wisely.

26 SBC s Credit Guarantee Program: Goals Encourage banks to lend to MSMEs that t do not easily meet their standards (e.g. collateral cover, credit and business track record) Guarantor (usually government) pays in case borrower defaults Mainstreaming of MSME financing (with less need for government intervention) More MSME borrowing from banks (shift from informal to formal credit) M b k ff i ibl l f iliti t MSME ( hift f More banks offering accessible loan facilities to MSMEs (shift from collateral-based to risk-based lending)

27 SBC s Credit Guarantee Program: Goals Thus, credit guarantees create additionality in the short- /medium-term, enabling banks to lend more which would otherwise be impossible without guarantees. credit guarantees provide learning opportunity in the long-term, making banks understand MSMEs better and giving them confidence in the profitability of MSME lending even with the absence of guarantees.

28 SBC s Credit Guarantee Program Operates on a basis of risk-sharing sharing with 58 accredited financial institutions (AFIs) composed of commercial, development, rural, and thrift banks Guarantees loans of MSMEs with AFIs against risk of non-repayment of loan with SBC taking on the bigger bulk of the risk of the fee Major enhancement in the program is the application of a risk-based lending framework Evaluation of loan applications is purely based on risk factors pertaining to the borrower Use of a borrower risk rating (BRR) system, a tool that helps control credit risks

29 SBC s Credit Guarantee Program Types of Guarantee Facilities Guarantee for Gearing-Up Enterprises (SME-GEAR) A guarantee facility for clean loans or loans not covered by hard collateral l whether real state or chattel. Guarantee for Growing Enterprises (SME-Grow) A guarantee facility for loans with insufficient collateral, where the guarantee cover is limited to the unsecured portion only. SBC does not share on future collateral recoveries. Guarantee for Gainful Enterprises (SME-GAIN) A guarantee facility where the guarantee cover is on the entire loan inclusive of the secured portion. SBC does not share on future collateral recoveries on pari-passu basis.

30 SBC s Credit Guarantee Program Guarantee Cover SME-GEAR SME-GROW SME-GAIN Guarantee Cover 70% of loan amount but 70% of the unsecured 80% of loan amount but not to exceed P6.0 M portion of the loan amount but not to exceed P6.0 M not to exceed P10.0 M Guarantee Fee Borrower Risk Rating Guarantee Fee (p.a.) Monitoring Requirement 1 1 % Annual BRR review % % Annual BRR review plus 4 2 % semi-annual CI 5 and up 3 % Semi-annual BRR review including CI

31 SBC s Credit Guarantee Program: Strengths A guarantee system that is working should have the following characteristics: 1. It is adequately-funded that makes it a surety. 2. It is risk-based. 3. It is proactive.

32 SBC s Credit Guarantee Program: Strengths 1. It is adequately-funded that makes it a surety. Payment of claim of creditor bank in case of MSME borrower default Guarantor honors all valid guarantees, regardless of later behavior of creditor bank and/or MSME borrower Continued guarantee cover except on ff cases: Late or non-repayment of guarantee fee Loans released after occurrence of default Imperfect loan documentation

33 2. It is risk-based. SBC s Credit Guarantee Program: Strengths Credit evaluation based on borrower risk rating Credit evaluation is enterprise-based and not portfolio-based in favor of creditor bank BRR as determinant of pricing of guarantee (lower pricing for better-rated rated borrowers) Collateral as a determinant of pricing, not credit decision High importance for matching of loan purpose and loan term Proper valuation of debt-servicing capacity is crucial (through evaluation of actual FS, historical figures, credit investigation) Loan should be supported by project assets Creditor bank should have a share in the risk guarantor does not allow guarantee cover to be 100% so that banks will have incentive to properly p manage loans (70% to 80% guarantee cover is ideal)

34 2. It is risked-based. SBC s Credit Guarantee Program: Strengths The Borrower (BRR) System Adoption of a risk-based lending framework Use of borrower risk rating (BRR system) to help control credit risk Used both for both SME borrowers and partner financial institutions BRR System as a scorecard Evaluation of loan ad guarantee applications is purely based on risk factors pertaining to the borrower A scorecard is used to compute borrower s risk and is focused on four areas also know as CAMP: Cash refers to financials Administration refers i i to owners or management Market refers to market condition for specific products/services Production refers to ability of enterprise to meet market demands

35 SBC s Credit Guarantee Program: Strengths 3. It is proactive. Early validation of legal papers Per drawdown / PN basis for payment for guarantee call and payment Payment received in short-period

36 SBC s Credit Guarantee Program: Weaknesses 1. Weak structural support. Fragmentation. Lack of rationalized approach to setting up of new guarantee structures Supervision by Bangko Sentral ng Pilipinas (BSP) using bank regulatory structure No sovereign guarantee cover 2. Limited resources resulting in limited impact SBC has authorized capitalization of P10 B but paid-in capital of only P2 B. SBC s asset size of P4.9 billion today was achieved by obtaining loans from multilateral t l agencies (ADB, KffW, and IFAD) SBC has other mandates outside of guarantee SBC has been modestly profitable over the years 3. SBC has cumulative guaranteed loans of only P1.7 B from 2002 to 2009 In contrast, GFSME had P6.17 B in guarantees ( ), 1999) out of a seed fund of only P300 M. Main difference is LACK OF SOVEREIGN GUARANTEE.

37 SBC s Credit Guarantee Program: Weaknesses 4. SBC is forced to target a low leverage ratio of 3x 5. Philippines has other guarantee programs that are not necessarily harmonized Philippine Export-Import Credit Agency (PhilEXIM) for exports Credit Surety Fund Sponsored by BSP for small cooperatives Agricultural Guarantee Fund for agriculture

38 Conclusion 1. Guarantee system in the Philippines i is at a crossroad. 2. Challenge of the new Government is to have the political will beef up resources and implement reforms. 3. Guarantee operations are at best break-even even operations, in the long run. Even successful guarantee operations benefit from subsidy. However, the additionality and economic benefits of loans guaranteed more than make up for the subsidy. 4. Leverage is the key. 5. Credibility is important. VALUE OF SOVEREIGN COVER.

39 Conclusion 6. Guarantee programs are risk programs. Policy-makers must show willingness to take a hit. Fiscal deficit situation in the Philippines makes it difficult to take on an aggressive stance. 7. The country cannot afford a fragmented approach to credit guarantees operations. We should rationalize. 8. The guarantee programs that work are big and well-capitalized and are fully supported by government. An enlightened regulatory scheme is also needed. Rules for regulating g banks should be different from rules in supervising guarantee operations. 9 Optimism that the new government will be bold enough to 9. Optimism that the new government will be bold enough to reinvigorate the Philippine credit guarantee system.

40 Recommendations For the enhancement of existing credit guarantee schemes: Confront credit guarantee problems at a national level, with initiatives coming from the national government for support and enhancement Harmonization of all credit guarantee programs For less dependence on credit guarantees: A well-developed financial system with a good credit information system A legal and regulatory environment that is conducive to MSME lending, ki it tt ti t b ki i tit ti making it attractive to banking institutions

41 THANK YOU!