Completion Report. Project Number: Loan Number: 2186 October Philippines: Small and Medium Enterprise Development Support Project

Transcription

1 Completion Report Project Number: Loan Number: 2186 October 2010 Philippines: Small and Medium Enterprise Development Support Project

2 CURRENCY EQUIVALENTS Currency Unit peso (P) At Appraisal At Program Completion (16 August 2005) (13 February 2009) P1.00 = $0.017 $0.021 $1.00 = P55.75 P47.25 ABBREVIATIONS ADB Asian Development Bank BSP Bangko Sentral ng Pilipinas (Central Bank of the Philippines) BRR borrower risk rating CIB credit information bureau CISA Credit Information Systems Act DTI Department of Trade and Industry GTZ Deutsche Gesellschaft für Technische Zusammenarbeit (German Technical Corporation) JFICT Japan Fund for Information and Communication Technology KfW Kreditanshalt fur Wiederaufbau (German Development Cooperation) MART Money Market Association of the Philippines MSMEs micro, small and medium-sized enterprises MTPDP Medium-Term Philippine Development Plan NPL nonperforming loan PBR Philippine business registry PCG partial credit guarantee PFI participating financial institution PSOD Private Sector Operations Department ROA return on asset SBC Security Bank Corporation SB Corporation Small Business Guarantee and Finance Corporation SMEs small and medium-sized enterprises SULONG SME Unified Lending Opportunities for National Growth TA technical assistance

3 NOTES (i) (ii) The fiscal year (FY) of the Government of the Philippines and its agencies ends on 31 December. In this report, "$" refers to US dollars. Vice-President C. Lawrence Greenwood, Jr., Operations 2 Director General K. Senga, Southeast Asia Department (SERD) Director J. Ahmed, Financial Sector, Public Management, and Trade Division, SERD Team leader E. Sasaki, Senior Financial Sector Specialist, SERD Team members R. Aquino, Assistant Project Analyst, SERD P. Bracey, Senior Investment Specialist (Capital Markets), Capital Markets and Financial Sectors Division, Private Sector Operations Department In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

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5 CONTENTS Page BASIC DATA i I. PROGRAM DESCRIPTION 1 II. EVALUATION OF DESIGN AND IMPLEMENTATION 1 A. Relevance of Design and Formulation 1 B. Project Outputs 2 C. Project Costs 8 D. Disbursements 8 E. Project Schedule 9 F. Implementation Arrangements 9 G. Conditions and Covenants 9 H. Associated Technical Assistance 10 I. Performance of the Borrower and the Executing Agency 11 J. Performance of the Asian Development Bank 11 III. EVALUATION OF PERFORMANCE 11 A. Relevance 11 B. Effectiveness in Achieving Outcome 11 C. Efficiency in Achieving Outcome and Outputs 12 D. Preliminary Assessment of Sustainability 12 E. Impact 12 IV. OVERALL ASSESSMENT AND RECOMMENDATIONS 13 A. Overall Assessment 13 B. Lessons 14 C. Recommendations 14 APPENDIXES 1. Design and Monitoring Framework List of Accredited PFIS under the SME Wholesale Lending Status of Compliance with Loan Covenants An Overview of Small Business Guarantee and Finance Corporation 24

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7 i BASIC DATA A. Loan Identification 1. Country 2. Loan Number 3. Project Title 4. Borrower 5. Executing Agency 6. Amount of Loan 7. Project Completion Report Number B. Loan Data 1. Appraisal Date Started Date Completed 2. Loan Negotiations Date Started Date Completed 3. Date of Board Approval 4. Date of Loan Agreement 5. Date of Loan Effectiveness In Loan Agreement Actual Number of Extensions 6. Terminal Date to Commitment In Loan Agreement Actual Number of Extensions 7. Closing Date In Loan Agreement Actual Number of Extensions 8. Terms to the Borrower Interest Rate Maturity (number of years) Grace Period (number of years) 9. Terms of Relending (if any) 10. Interest Rate for Subloans Original Revised Philippines 2186 Small and Medium Enterprise Development Support Project SB Corporation with a guarantee from the Republic of the Philippines SB Corporation $25 million PCR: PHI February April Aug Aug September December March February October 2013 On-going 0 30 April February LIBOR % 15 years 3 years 7.2% % 6.3% to 8.5%

8 ii 11. Disbursements a. Dates Initial Disbursement 08 March 2006 Effective Date 28 February 2006 Final Disbursement 13 February 2009 Original Closing Date 30 April 2011 Time Interval 35 months Time Interval 62 months Category or Subloan b. Amount ($ million) Last Revised Allocation Net Amount Available Original Allocation Amount Canceled Amount Disbursed Undisbursed Balance Phase I a Phase II a (0.254) Total a a Total amount of 1,098,650,000 for Phase I and 1,647,975,000 for Phase II were fully disbursed; the balance of $0.198 was due to exchange rate at the time of payment. C. Implementation Data 1. Number of Subloans Sectoral Distribution of Subloans - wholesale and retail banking Sector Projected Actual Wholesale Banking Retail Banking Total 3. Size of Subloans (actual) Range in million US dollars Number of Subloans Aggregate Amount Up to $0.5 million From $0.501 to $1,0 million From $1.001 to $2.0 million Over $2 million

9 iii 4. Other Breakdown of Subloans Criteria Projected Actual Wholesale to PFIs - Criteria Three years financial and institution performance on: quantitative - profitability, asset quality, solvency and liquidity 2. qualitative - management quality and compliance with the regulatory and industry standards 3. Composite CAMEL rating of Borrower s Risk Rating of 5.0 Retail Window - Criteria MSMEs in manufacturing, exporting, trading, supplying, exporting activities with assets not less than P500 thousand and land not more than P100 million value, one year good track record, except SME contractors Total Subloans Above Free Limit Subloan Aggregate Number Amount None all subloans were within the limit of P25.0 million per borrower Project Performance Report Ratings Implementation Period Development Objectives Ratings From 1 July 2006 to 31 December 2006 Satisfactory Satisfactory From 1 January 2007 to 30 June 2007 Satisfactory Satisfactory From 1 July 2007 to 31 December 2007 Satisfactory Satisfactory From 1 January 2008 to 30 June 2008 Satisfactory Satisfactory From 1 July 2008 to 31 December 2008 Satisfactory Satisfactory From 1 January 2009 to 30 June 2009 Successful Successful Implementation Progress

10 iv D. Data on Asian Development Bank Missions Name of Mission Date No. of Persons No. of Person-Days Specialization of Members Fact Finding Appraisal 16 Feb 18 April b, d, e Inception 3 4 April b, d Mid-Term Review February c, d Loan Review 2 6 July; 7 10 August c, d Loan Review Sept d Project Completion Review 31 May 4 June c, d a = economist, b = financial economist, c = project analyst, d = financial sector specialist, e = counsel, f = economist and financial sector officer.

11 I. PROJECT DESCRIPTION 1. The Small and Medium Enterprise Development Support Project, involved (i) a JPY2,746,625,000 ($25 million equivalent at the exchange rate prevailing at the time of loan effectiveness) project loan from the public sector window of the Asian Development Bank (ADB); and (ii) an up-to P1 billion partial credit guarantee (PCG) and an up-to $1 million equity investment in a credit information bureau from the private sector window. ADB approved the project on 29 September The project loan was signed on 16 December 2005 and became effective on 28 February The project was designed to help the Government of the Philippines implement its Small and Medium Enterprise Development Plan by: (i) improving the enabling environment for small and medium-sized enterprises (SMEs); (ii) augmenting financial resources at the Small Business Guarantee and Finance Corporation (SB Corporation) and expanding private sector lending to SMEs through a partial credit guarantee; (iii) strengthening SB Corporation's credit underwriting and risk management; and (iv) helping establish a credit information system through an equity investment in the planned credit information bureau. ADB technical assistance (TA) implemented from August 2005 to February 2007 supported item (iii). 2 ADB also approved, on 30 August 2005, grant assistance financed by the Japan Fund for Information and Communication Technology (JFICT) for developing the Philippine Business Registry, 3 a web-based unified business registry system to support items (i) and (iii). As the Executing Agency, SB Corporation implemented the project and the associated TA. The updated design and monitoring framework of the project is in Appendix 1. II. EVALUATION OF DESIGN AND IMPLEMENTATION A. Relevance of Design and Formulation 2. The Small and Medium Enterprise Development Support Project was consistent with ADB's country strategy and program update, for the Philippines, 4 which was aligned with the Medium-Term Philippine Development Plan (MTPDP), focusing on poverty reduction and recognizing SME development through public and private partnership as a potent tool for promoting sustainable growth and generating employment. The country strategy and program, closely reflected the development agendas in the MTPDP, It called for supporting entrepreneurs and SMEs to create new jobs and promote broad-based growth. The project, associated TA, and the JFICT project cover a broad area of SME development aimed at improving the enabling environment for SMEs, expanding SME lending through SB Corporation's wholesale and retail lending facilities, strengthening SB Corporation's loan originations and credit management functions, and augmenting the credit authority of selected commercial banks through a partial credit guarantee. Furthermore, the project was designed to complement other development partners' assistance, including assistance from the German Technical Corporation (GTZ) and the Canadian International Development Agency (CIDA) to launch a business development services (BDS) system, and financing for SME development from the German Development Corporation (KfW). Collectively, these 1 ADB Report and Recommendation of the President to the Board of Directors: Proposed Loan, Partial Credit Guarantee, and Equity Investment to the Republic of the Philippines for Small and Medium Enterprise Development Support Project. Manila. 2 ADB Strengthening SME Credit Management Systems. Manila. 3 ADB Grant Assistance to the Republic of the Philippines for Developing the Philippine Business Registry (Financed by the Japan Fund for Information and Communication Technology). Manila. 4 ADB Country Strategy and Program Update, Manila. 5 ADB Country Strategy and Program, Manila.

12 2 interventions were expected to enhance overall sector investments, outputs, exports, and employment. B. Project Outputs a. Project Loan 3. The ADB loan of 2,746,625,000 ($25 million equivalent at the exchange rate prevailing at the time of loan effectiveness) was fully disbursed in two phases. In the first phase, 1,098,650,000 ($9.548 million) was released in five installments during 2006, which was fully utilized for wholesale lending in pesos. Upon the comprehensive review of the first-phase activity, 1,647,975,000 ($ million) was released in four installments from 2007 to In the second phase, the ADB loan was also fully utilized for wholesale (75%) and retail (25%) lending in pesos. 4. ADB Loan Utilization. During project implementation, ADB-funded loan resources were recycled for SB Corporation's lending operations to SMEs. Cumulative lending totaled P3.256 billion, nearly three times larger than the initial drawdown amount. The ADB loan's turnover ratio was 283%. The turnover ratio for wholesale lending was 290%, while that for retail lending was 240%. Short-term loans of a less than 1-year maturity accounted for 89% of wholesale lending and 84% of retail lending. This was because SMEs have high demand for short-term loans to finance working capital. SB Corporation estimates that 90% of SME credit is for working capital financing. Since the latter half of 2006, when KfW started providing its loan to SB Corporation for SME lending, the ADB-funded loan portfolio became more short-termoriented because of an agreement among ADB, KfW, and SB Corporation that made ADB the main provider of short-term SME loans and KfW the main provider of long-term SME loans. Table 1 shows the ADB-funded loan portfolio breakdown by loan tenures: Table 1: ADB-Funded Loan Portfolio Breakdown by Loan Tenures (Cumulative loan utilization, February 2006 March 2009) (P million, unless otherwise indicated) Loan Term Wholesale Retail Total Less than 6 months 2, ,354 6 months to 1 year More than 1 year Total 2, ,256 Turnover 290% 240% 283% Source: SB Corporation.

13 3 5. Historical Loan Origination. Table 2 breaks down SB Corporation's historical loan origination from 2005 to 2009 by number of borrowers, loan release, and average loan amount. A sharp drop in loan release in 2009 was due to declining demands for SME credit amid an uncertain business environment especially after the second quarter. The global economic and financial crisis negatively affected the SME business environment beginning in the fourth quarter of Moreover, the Central Bank of the Philippines (BSP) increased the size and lowered the interest rate of its rediscounting facility to provide additional liquidity to the banking system. This directly competed with SB Corporation's wholesale lending operations. The average loan amount under the wholesale lending facility declined gradually from P7.5 million in 2006 to P2.3 million in 2009 as SB Corporation expanded its network to rural banks in remote areas. The average loan amount under the retail lending facility ranged from P2.3 million to P3.0 million during Table 2: Historical Loan Origination from February 2006 to March 2009 Number of Borrowers, Loan Release, and Average Loan Amount Year/Facility 2005 Retail Lending Wholesale Lending Total Number of Borrowers Loan Release (P million) 440 2,459 2,899 Average Loan Amount (P million) Retail Lending Wholesale Lending Total ,731 3, Retail Lending Wholesale Lending Total ,484 2, Retail Lending Wholesale Lending Total ,365 2, Retail Lending Wholesale Lending Total ,382 1, Source: SB Corporation. 6. Number of Partner Financial Institutions under the wholesale lending facility. Forty-four partner financial institutions (PFIs), including rural banks in remote areas, participated in the wholesale lending operations of SB Corporation. A list of participating PFIs is in Appendix 2.

14 4 7. Impact on Employment. It is assumed that every P80,000 loan creates one job, and 30% of the jobs created are new jobs. When these formulae, which are used uniformly by the government financial institutions (including SB Corporation), are applied to SB Corporation's lending operations, it is assumed that some 130,000 jobs were created during project implementation, of which about 40,000 were new jobs. The ADB loan accounted for 11% of SB Corporation's total lending in 2006, 51% in 2007, 61% in 2008, and 76% in the first half of Regional distribution of SME borrowers. Figure 1 and Figure 2 below show regional distributions of ADB-funded retail lending and wholesale lending in terms of loan amount. While wholesale lending has been fairly evenly distributed among Luzon, the Visayas, and Mindanao especially in 2009 retail lending has been concentrated more in Luzon and less in Mindanao. This is because the average loan size in Mindanao is much smaller than in Luzon and the Visayas. In terms of the number of borrowers, however, Mindanao had 17% while Luzon had 71% and the Visayas only 12% in SB Corporation targets a regional distribution of 60% for Luzon, 20% for Visayas, and 20% for Mindanao in terms of total loan amount. Figure 1 Regional Distribution of SMEDSP Wholesale Lending (2006 to March 2009) 100% 90% 80% Mindanao, 13% Visayas, 16% Mindanao, 31% Mindanao, 37% Mindanao, 32% 70% 60% 50% 40% 30% 20% Luzon, 72% Visayas, 22% Luzon, 48% Visayas, 17% Luzon, 46% Visayas, 29% Luzon, 38% 10% 0% (Jan-Mar) Year SMEDSP = Small and Medium Enterprise Development Support Project. Source: SB Corporation.

15 5 Figure 2 Regional Distribution of SMEDSP Retail Lending 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Visayas, 15% Mindanao, 1% Luzon, 84% Mindanao, 5% Visayas, 30% Luzon, 65% Mindanao, 3% Visayas, 26% Luzon, 72% (Jan-Mar) Year SMEDSP = Small and Medium Enterprise Development Support Project. Source: SB Corporation. 9. Past due. Historical past due ratios of SB Corporation's wholesale lending window have been maintained at less than 3% during the implementation period. SB Corporation's PFI accreditation system, based on borrower risk rating (BRR) the credit scoring model developed by the associated TA (paras ) helped maintain a quality credit standing of PFIs 6. Retail lending past due, on the other hand, has stayed at a high level between 15% and 28%. This is attributed to a limitation that SB Corporation had been suffering from under the previous law governing SME loans, Republic Act Under that law, SB Corporation had to seek congressional approval to write off nonperforming loans, which hindered SB Corporation's ability to flexibly manage its loan portfolio. In addition, the law forced SB Corporation to keep cumulative nonperforming loans since 1997 (when its retail lending operations commenced) on its books. The law was amended in May 2008 by Republic Act 9501, or the Magna Carta for Micro, Small and Medium Enterprises, which allowed SB Corporation to write off nonperforming loans following its by-laws and BSP rules. It is expected that the new law will reduce the past due ratio of retail loans. Table 3 below tracks the past due ratio of SB Corporation's wholesale and retail loans from February 2006 to March A PFI must meet the BRR of 5.0 out of Republic Act 6977, as amended by Republic Act 8289, known as the Magna Carta for Small Enterprises.

16 6 Table 3: Historical Past Due Ratio of SB Corporation from February 2006 to March 2009 (P million, unless otherwise indicated) Year/Facility 2005 Retail Lending Wholesale Lending Past Due Total Loans Outstanding 532 1,025 Loan Loss Provision Past Due Ratio (Net of Provision) 19.9 % 4.5 % 2006 Retail Lending Wholesale Lending , % 1.5 % 2007 Retail Lending Wholesale Lending , % 1.2 % 2008 Retail Lending Wholesale Lending , % 3.0 % 2009 Retail Lending Wholesale Lending % 0.8 % Source: SB Corporation. b. Credit Scoring 10. Associated TA that was integral to the Small and Medium Enterprise Development Support Project was successfully implemented from August 2005 to February The TA enhanced SB Corporation's institutional capacity by reorganizing its management structure, introducing a credit scoring model, developing a management information system, and improving its products (see paras. 26 and 27 for more on this TA). 8 It has helped SB Corporation utilize the ADB loan efficiently and effectively for SME lending through wholesale and retail facilities. The TA also contributed to the development of the BRR tool, which after completion of the TA was disseminated and shared with SB Corporation's PFIs through workshops funded by KfW. The BRR tool helps PFIs evaluate, monitor, and manage SME loans, and will improve the overall quality of their loan portfolio. c. Partial Credit Guarantee 11. The project included, as a private sector operation, a PCG for selected commercial banks without sovereign guarantee. The PCG was to have an overall limit of P1 billion (equivalent to $18.40 million at the exchange rate prevailing at the time of appraisal); the PFIs covered the remaining risk of P1 billion. In addition to the proposed 50/50 risk-sharing scheme between ADB and the PFI, ADB will negotiate a first-loss provision (based on the PFI s loss experience) to be entirely assumed by the PFI. Primarily international banks and local banks 8 ADB Technical Assistance Completion Report Strengthening SME Credit Management Systems (TA PHI with the approved amount of $500,000). Manila.

17 7 accredited in the ADB regional Trade Finance Facilitation Program 9 were to be considered for inclusion in the PCG facility subject to approval from the Director General of ADB s Private Sector Operations Department (PSOD) and ADB s Guarantee Committee, as well as satisfactory due diligence by PSOD. The PCG compliments SB Corporation s lending operations by focusing on larger SMEs that are not covered by SB Corporation. A PCG can be provided to ADB-accredited banks until PSOD, in close collaboration with the Office of Cofinancing Operations, was to structure, process, and monitor the PCG facility. Thus far, one bank Security Bank Corporation (SBC) has utilized this facility. 12. SBC is a medium-sized bank with total assets of P billion as of end Under the program, ADB was to guarantee 50% of SBC s exposure for SME lending. On 26 April 2007, the Guarantee Facility Deed was signed with SBC for a maximum amount of P500 million (US$10.5 million), of which P100 million (US$2.1 million) is effective. SBC, in a bid to diversify its loan portfolio, entered the higher-yield SME market. The strategy involves program lending for SMEs that are within the value chain of the bank's corporate clients. To contain the risk associated with SME lending, a specific lending program with set parameters was developed for a specific group of SMEs. These SMEs had to meet a pre-approved set of prudent credit criteria and every facet of the credit process had to conform with defined procedures. This enabled SBC to process individual SME accounts faster, yet still follow sound credit underwriting procedures. As of end-2009, SBC had a distributorship program with one major food and beverage company within the Philippines. Given the successful utilization of this program, SBC has requested and ADB is considering granting an increase of the program limit for the existing distributor and an expansion of the program to include other distributors. In addition, other banks will be targeted for inclusion in the facility in line with the expansion of the Trade Finance Facilitation Program in the Philippines. d. Equity Investment in the Planned Credit Information Bureau. 13. On 31 October 2008, the President of the Philippines approved Republic Act No. 9510, "An Act establishing the Credit Information System Act (CISA)." Recognizing the need to collect and disseminate fair and accurate information about the track record of borrowers and the credit activities of all entities participating in the financial system, the CISA established a comprehensive and centralized credit information system. On 27 May 2009, the Implementing Rules and Regulation of the CISA (CISA rules) were approved by the Congressional Oversight Committee and became effective immediately. The CISA rules define which entities must submit credit information, specify the data to be submitted, and outline other rules and regulations. The CISA rules also established the Central Credit Information Corporation. 14. According to the CISA Rules, the authorized capital stock of the Central Credit Information Corporation will be P500 million, divided into million common shares with a par value of P100, and million preferred shares with a par value of P200. The government will purchase 60% of the common shares through budgetary appropriation. Qualified investors (limited to industry associations of banks, quasi-banks and other credit-related associations, including associations of consumers) will purchase the remaining 40%. The restricted ownership 9 The Trade Finance Facilitation Program (TFP) provides loans and guarantees through banks in support of international and intra-regional trade. In March 2009, ADB approved the expansion of the TFP, from its initial approval of $150 million in exposure limits in 2003, to $1 billion. TFP expansion has been aggressive throughout 2009 and 2010, including in the Philippines. In February 2010, limits were approved for eight banks, of which four have signed TFP agreements. As of June 2010, the TFP conducted 13 transactions supporting over $4.5 million of trade in the Philippines.

18 8 of the Central Credit Information Corporation precludes an ADB equity investment in a credit bureau (the project originally envisaged such an investment by ADB). e. Philippine Business Registry 15. The JFICT project of $700,000 was approved by the ADB on 30 August It was designed to help the government develop the Philippine Business Registry (PBR), with the aim of shortening the time required to license and register businesses, thus reducing the cost of doing business in the Philippines, improving the overall business environment, and ultimately increasing domestic and foreign investment. The PBR is a web-based portal site for providing: (i) unified registration and licensing procedures, and; (ii) business development information to Philippine businesses. Project implementation started in March 2006 and ended in December The project interfaced the PBR to the registration systems of partner agencies and local government units, which are considered critical to the success of the PBR. So far 18 central government agencies and 30 local government units have been electronically connected with the PBR. The JFICT project has also supported institutional development within 15 National Economic Research and Business Assistance Centers nationwide; these centers are engaged in business development and the facilitation of business registration and licensing. f. A Blueprint of a Movable Collateral Registry 16. The associated TA was to create a blueprint for a movable collateral registry based on a review of existing laws and recommendations for amending current laws or creating new ones. However, internal consultations found that the Philippines' legal and regulatory environment was sufficiently strong to establish a movable collateral registry. Based on this finding, SB Corporation and ADB agreed that analytical work to formulate a blueprint for a movable collateral registry be dropped from the original TA scope (footnote 7). C. Project Costs 17. ADB's share of SB Corporation funding for relending under the wholesale lending facility and onlending under the retail lending facility is set at a maximum of 65%. This limit was adhered to for the entire implementation period, with the ADB share standing at 54% for wholesale lending and 35% for retail lending. D. Disbursements 18. The Small and Medium Enterprise Development Support Project was to be implemented over 5 years from the effective date of 28 February The closing date for submission of drawdown applications, and approval and authorization for disbursement from the loan, was to be 28 February The loan was actually fully withdrawn with the last drawdown in January 2009, 2 years ahead of the planned schedule. This was because the cost of the ADB loan was significantly lower than the cost of SB Corporation's traditional funding, and by utilizing the ADB loan more quickly SB Corporation was able to rapidly lower its average funding costs. 10 SB Corporation conducted the ADB-funded operations efficiently for earlier disbursements than planned due to the cost-related incentive. 10 While the Yen-Libor-based ADB loan has provided a funding cost of about 5.2% per annum in peso terms, both preferred and common shares have been paying a dividend of 8% per annum. As the interest payment is taxdeductable but share dividend is not, the difference is even larger. Early disbursements would also reduce commitment charges payable to ADB, as a commitment charge of 0.75% per annum was charged against the unutilized potion of the ADB loan.

19 9 E. Project Schedule 19. The project was closed in February 2009, 2 years ahead of the planned schedule. F. Implementation Arrangements 1. SB Corporation Relending to PFIs and Onlending to SMEs a. Relending to PFIs 20. A total of $21.25 million equivalent of the ADB loan has been lent through SB Corporation s accredited PFIs for onlending to eligible SMEs under the wholesale lending facility. The amount of these loans ranges from P100,000 to P15 million, with maturities from 1 year to 5 years. Since 20 June 2007, SB Corporation has charged PFIs relending rates of 6.3% 8.0% per annum for loans of less than 1 year maturity, and 7.0% 8.5% per annum for loans of more than 1-year maturity. PFIs added charges to cover their costs and reflect the credit risk. SB Corporation created revolving funds from repaid subloans to make new loans under the same criteria. Monthly charges to PFIs are computed based on 80% of the benchmark rate of the Money Market Association of the Philippines (MART I), plus 0.1% plus gross receipts tax. SB Corporation has been accrediting PFIs using the BRR tool, which basically corresponds to ADB Guidelines on Financial Intermediary Loans. b. Onlending to SMEs 21. Of the ADB loan, $3.75 million equivalent has been allocated to SB Corporation s retail lending. Retail loans have ranged from P200,000 to P5 million, with maturities up to 5 years and interest rates determined based on the BRR and the degree of security. Interest rates since 1 April 2009 have been 10.1% per annum for fully secured loans with up to 1 year maturity, 10.8% per annum for loans with 1 3 year maturity, and 11.9% per annum for loans with 3 5 year maturity. An additional charge of 0.4% 4.4% (depending on the BRR) and 0.1% 0.7% (depending on the degree of security) were imposed. SB Corporation created revolving funds from repaid subloans to make new loans under the same criteria. 22. Since 2007, ADB has provided short-term loans and KfW has provided long-term loans to SMEs in accordance with an operational demarcation agreed upon by ADB, KfW, and SB Corporation. Implementation arrangements have been adequate to fund SB Corporation's SME lending under both its wholesale and retail facilities. Revolving funds have seen a high turnover of 290% for wholesale lending, and 240% for retail lending during project implementation. 2. Partial Credit Guarantee 23. Since April 2007, one commercial bank SBC has been utilizing the partial credit guarantee facility with a maximum amount of P500 million, of which P100 million is effective. ADB is considering increasing the program limit in response to SBC s request. Other banks will be targeted for inclusion in the facility. G. Conditions and Covenants 24. SB Corporation complied with almost all of the covenants, with some delay in the submission of the financial reports. SB Corporation partly complied with the return on asset (ROA) and nonperforming loan (NPL) ratio requirements. In 2007, the ROA was 2.3% higher

20 10 than the covenanted figure of 2%. However, in 2006 the ROA was 1.7% and in 2008 the ROA was only 0.4%. The low 2006 ROA figure was mainly attributable to increased assets on ADB loan release. The low 2008 ROA Figure was mainly attributable to a large other income deduction (mainly comprising the foreign exchange loss caused by the utilization of the KfW loan in 2008). SB Corporation partly complied with the required NPL ratios. It complied with the required NPL ratio for wholesale lending, 11 but not for retail lending. Annual NPL ratios for retail banking were much higher than banking industry averages because of the reasons mentioned in para. 9. The retail lending NPL ratio was 26.5% in 2007 (industry average 5.1%), 23.8% in 2008 (industry average 3.9%), and 15.3% in 2009 (industry average 3.1%). The status of compliance with loan covenants is in Appendix 3). Key financial data for SB Corporation from are in Appendix According to the historical data, the submission of annual audited financial reports by SB Corporation ranged from 7 months to 9 months after the close of the fiscal year longer than the covenant requirement of not later than 6 months after the close of the fiscal year. SB Corporation explained that the delay was due to the Commission on Audit's heavy workload (the commission is tasked with auditing a large number of government owned and controlled corporations and other government agencies). H. Related Technical Assistance 26. TA 4523 PHI: Strengthening SME Credit Management Systems was approved on 23 December 2004 and implemented from June 2005 to February The TA completion report was submitted in December 2007 (see footnote 7). The TA was designed to expand the quantity and improve the quality of SB Corporation's lending operations, while lowering risk by (i) enhancing the management information system; (ii) updating and/or redesigning SME loan products incorporating cash flow, character, and nontraditional collateral into underwriting; (iii) developing a credit scoring model for SB Corporation's retail lending, and; (iv) creating a blueprint for registry of movable collateral. The consultants successfully met the terms of reference of the TA and delivered their reports on time. The following is a summary of key outputs: (i) (ii) (iii) Lending Business The TA provided international expertise to SB Corporation managers and staff in support of building efficient, profitable lending businesses that can achieve substantial outreach. Underwriting Process The TA provided a specialist in loan product development who worked with SB Corporation management to ensure that nonasset-based lending methodologies are incorporated into their underwriting process. Credit Scoring Model The TA assisted SB Corporation in developing a proprietary credit scoring model that incorporates SB Corporation's own underwriting standards and draws upon lessons learned from its own lending experience. Based on the available database, the credit scoring model was further developed into the BRR system, which associates classes of borrowers with various empirically determined default probabilities. 11 Wholesale lending NPL ratios were 1.5% for 2006, 1.2% for 2007, 3.0% for 2008, and 0.8% for 2009.

21 Overall, the TA was successful, as it achieved its objectives. The formulation of the TA scope and design was coordinated closely with the Executing Agency, SB Corporation, resulting in a strong partnership. The various training workshops utilized case studies and discussion methods and drew strong participation from the officers and management of SB Corporation. The expected outcome to improve the quality of lending operations of SB Corporation has been achieved through reorganization and establishment of a good risk management system. Since the completion of the TA, SB Corporation has continued to improve its systems. I. Performance of the Borrower and the Executing Agency 28. SB Corporation, as Executing Agency and borrower, implemented the Small and Medium Enterprise Development Support Project and the associated TA effectively, meeting fully the responsibilities assigned in the implementation plan, with no performance weaknesses identified. The institutional capacity of SB Corporation in implementing the TA was adequate. This facilitated an earlier-than-projected closing of the credit line operation and timely completion of the TA. Furthermore, the TA improved SB Corporation's SME lending capacity by reorganizing its management structure, improving its underwriting process, and introducing a credit scoring model. The performance of SB Corporation as borrower and Executing Agency is rated highly satisfactory. J. Performance of the Asian Development Bank 29. ADB, with SB Corporation s assistance, carried out a comprehensive review of the project in February 2007, 12 months after loan effectiveness. The review assessed progress of lending under the first phase of the loan and analyzed the deliverables from the associated TA to evaluate SB Corporation's progress in strengthening its credit evaluation and risk management practices. ADB conducted annual project reviews in August 2007 and September In addition, ADB coordinated with KfW to ensure complementarity between the ADB and KfW credit lines and associated TA. SB Corporation's completion report confirmed that three ADB project review missions were conducted, and determined that ADB guidelines conformed with and did not contradict government and SB Corporation guidelines. The report noted that ADB provided training on ADB policies and guidelines, and that this training helped SB Corporation better manage the project and minimize problems. ADB's project implementation was adequate and timely. The performance of ADB is rated satisfactory. III. EVALUATION OF PERFORMANCE A. Relevance 30. The design of project was relevant. The project design was consistent with ADB's country strategy and program, the government's MTPDP, and other development partners' assistance in recognizing SME development as a potent tool for generating employment and reducing poverty. The project aimed to expand SME lending through SB Corporation, strengthen SB Corporation's credit management functions, and augment the credit authority of selected commercial banks through a PCG. The associated TA and the JFICT project were integral to the project. B. Effectiveness in Achieving Outcome 31. Neither SB Corporation's wholesale nor its retail SME lending saw growth during the implementation period. As Table 2 indicates, annual lending from fluctuated from

22 12 P420 million to P530 million for retail lending, and from P2.3 billion to P2.7 billion for wholesale lending. During the same period, gross outstanding loans in the Philippine banking system ranged between P2,153,568 billion (December 2005). Because of the business slowdown and BSP's move to increase the size and lower the interest rate of its rediscounting facility (para. 5), SB Corporation saw a sharp drop in lending in Retail lending declined 28% and wholesale lending declined 40% compared with Meanwhile, the number of SME borrowers taking out wholesale loans increased dramatically from about to 610 in 2009, as SB Corporation expanded its wholesale lending network to include smaller borrowers in the countryside. This brought down the average wholesale loan amount to about P2.3 million roughly the same average as retail loans. 32. Past due ratios improved from 28% in 2005 to 15% in 2009 for retail lending, and from 4.5% to 0.8% for wholesale lending. There had been a structural constraint to flexibly writing off nonperforming loans in retail lending (see para. 9). Under the new law, it is expected that past due ratios in retail lending will continue to decrease. The introduction of the BRR in retail lending and SB Corporation's move to share BRRs with PFIs have also improved the quality of SB Corporation's wholesale and retail loan portfolios. While ADB-funded SME credit lines failed to reach growth targets in lending, the improvement of SB Corporation's loan portfolio and its expanded outreach are positive signs. The project is rated effective. C. Efficiency in Achieving Outcome and Outputs 33. The ADB loan was utilized extremely well over the 3-year implementation period recycled through revolving funds for SB Corporation's lending operations. Cumulative lending to SMEs was almost three times larger than the initial drawdown amount. Against the original planned completion date of 28 February 2011, the project loan was closed on 13 February years ahead of schedule. That SB Corporation was able to make disbursements much earlier than planned is a sign of its efficiency. The project is rated highly efficient. D. Preliminary Assessment of Sustainability 34. Under Republic Act 9501 (para. 9), SB Corporation is mandated to champion national SME development through financial and related technical assistance, including information services, training, and marketing. 12 Given its enhanced role in implementing comprehensive SME development policies and programs, SB Corporation is likely to sustain its operations in the future, provided that the government remains committed to SME development. E. Impact 35. The ADB loan has replaced traditional funding resources for SME lending and reduced SB Corporation's average funding cost. Since the project commenced, traditional funding resources have been freed up for a new operation the Microfinance Wholesale Lending Facility for refinancing microfinance institutions' lending to their clients, which has seen good growth. Figure 3 shows the performance of the Microfinance Wholesale Lending Facility. The ADB loan has thus helped SB Corporation diversify its operations and become the leading government corporation engaged in microenterprise and SME development. 12 Securities and Exchange Corporation. 13 of RA 9501 stipulates, SB Corporation. shall be charged with the primary responsibility of implementing comprehensive policies and programs to assist MSMEs (Micro, Small and Medium Enterprises) in all areas, including but not limited to finance and information services, training, and marketing.

23 The ADB project loan was the first development-partner-funded credit line to SB Corporation. It was followed by the KfW credit line and a credit line provided by the International Fund for Agricultural Development (IFAD). 13 The ADB project helped catalyze this additional development partner funding on favorable terms and conditions, thus improving SB Corporation's long-term funding status. Figure 3: Microfinance Wholesale in million pesos 1,200 1, , Year Source: SB Corporation. IV. OVERALL ASSESSMENT AND RECOMMENDATIONS A. Overall Assessment 37. The Small and Medium Enterprise Development Support Project has helped SB Corporation expand its outreach, improve the efficiency of its loan operations, and strengthen the quality of its loan portfolio. The project and associated TA have helped SB Corporation strengthen its capacity and grow into the government's leading microenterprise and SME development corporation. The project has also helped catalyzed funding on favorable terms from other development partners to improve SB Corporation's funding base. While the project failed to achieve numerical targets in terms of loan growth set out in the design and monitoring framework, the project is rated successful based on the aforementioned positive institutional impacts. 13 The loan from KfW is an 11.7million denominated loan, effective in August 2006, to finance loans for micro, small and medium-sized private enterprises mainly in Mindanao and the Visayas. The loan has a 40-year term, including a grace period of 10 years, with an interest rate of 0.25% per annum. The loan form IFAD is a peso-denominated subsidiary loan from the Republic of the Philippines in the amount of SDR10 million equivalent, effective October 2006, to finance the Rural Micro Enterprise Promotion Programme. The loan has a 25-year term, including an 8- year grace period, with an interest rate of 4.75% per annum.

24 14 B. Lessons 38. A credit line operation can be efficiently conducted through a sound operating financial institution focused on sector development. SB Corporation's healthy institutional and operational structure (supported by the associated TA see para. 10), coupled with clear, effective laws (see paras. 9 and 34), have helped it conduct lending operations efficiently and effectively. In other words, vibrant SME lending operations must be supported by effective policy and institutional arrangements. C. Recommendations 39. Indicators in the design and monitoring framework should be realistic, focusing broadly on institutional development in SME financing rather than narrowly discussing loan growth. 40. The executing agency's 6-month window for submitting audited financial reports should be expanded. Delays in submission of these reports in this project were beyond the control of the executing agency, as the reports were prepared by the Commission on Audit. It is recommended that the submission deadline be extended to least 9 months from the close of the fiscal year. 41. Follow-up. The project augmented SB Corporation's lending resources to the extent that the ADB loan accounted for 51% of SB Corporation's total lending in 2007, 61% in 2008, and 76% in the first half of The ADB loan carries a 15-year term, with principal repayment starting in SB Corporation will need to seek alternative funding sources to sustain the current level of lending, as the outstanding ABD loan is declining year by year, and will become nil in Alternative funding sources might include commercial borrowing, capital markets, additional lending from development partners, or SB Corporation's preferred share and/or liability instruments subscription by lending institutions as an alternative compliance with the mandatory credit allocation to the micro, small and medium-sized enterprise sector under Republic Act The future funding status of SB Corporation should be monitored to confirm whether it can finance the level of SME lending supported by the project. 42. Figure 4 below shows SB Corporation's wholesale lending performance in recent years. The stagnancy witnessed in the last 3 years is mainly attributable to the BSP increasing the size and lowering the interest rate of its rediscounting facility to provide additional liquidity to the banking system in late 2008 (para. 5). The comparative advantage in price and size of the BSP facility has resulted in a sharp drop in SB Corporation's wholesale lending operations. 15 How SB Corporation locates its wholesale lending facility and develops other products in response to the BSP move and changing market conditions needs to be monitored. 14 RA 9501 mandates that all lending institutions allocate 8% of their total lending to micro and small enterprises, and 2% of their total lending to medium-sized enterprises. 15 BSP's rediscounting facility of P40 billion was activated in November 2008 to cope with possible adverse effects on the economy stemming from the global financial crisis. The BSP uses the facility to set monetary policy, provide liquidity, and act as the lender of last resort. It can be tapped at a rate referred to as the overnight reverse repurchase rate, which is substantially lower than SB Corporation's wholesale lending prime rate. The rediscounting facility has been almost fully utilized by the banking system. Its size was increased to P60 billion in March 2009 amid fears of an economic slowdown, before being decreased to P40 billion in February 2010 and P20 billion in May 2010 amid possible signs of inflationary economic expansion.

25 15 Figure 4: Wholesale Lending in million pesos 4,000 3,500 3,000 2,500 2,000 1,500 1, ,227 2,459 2,730 2,484 2,365 1, , Year Source: SB Corporation. 43. Additional assistance. Republic Act 9501 charges SB Corporation with primary responsibility for SME development in a broad range of areas, including finance, information services, training, and marketing (see footnote 10). During implementation of the project, SB Corporation disseminated and shared with PFIs the BRR developed by the associated TA, and conducted a financial literacy program for raising entrepreneurs' awareness of the importance of various financial concepts, including book-keeping, application of management information systems, business plans, and debt management. SB Corporation's effort to develop the capacities of PFIs and SMEs can be supported by future ADB assistance to fill the gap of financing its nonlending activities. 44. Figure 5 shows SB Corporation's guarantee operation performance since The low profile of the guarantee operation vis-à-vis lending operations is due to the corporate status of the guarantee, which requires PFIs to accept a 100% risk weight. The current governing law does not confirm the sovereign status of SB Corporation's credit guarantee, which would be of a 0% risk weight. While SB Corporation can seek endorsement of the national congress to the sovereign status granted to its guarantee products, it would benefit from ADB guaranteeing to back up its credit guarantee products, which would be 20% risk-weighted substantially lower than the current 100%. An ADB guarantee to back up SB Corporation's credit guarantee products would better meet the needs of SME financing institutions seeking a lower risk weight.

26 16 Figure 5: Credit Guarantees 500 in million pesos Year Source: SB Corporation. 45. Timing of the project performance evaluation report. The project performance evaluation report can be prepared after 2013 when the implementation period of the PCG facility is over.

27 Appendix 1 17 Design Summary Impact Improve the contribution of small and medium-sized enterprises (SMEs) to economic growth and employment DESIGN AND MONITORING FRAMEWORK Performance Actual Monitoring Mechanisms Indicators/Targets Achievements Increase in formal employment in SMEs. The government s goal is at least 6 million jobs created by 2010 based on the growth projections in the Medium Term Philippine Development Plan (MTPDP). Total employment generated by MSMEs a are the following: 2006 = 3,327, = 3,355, = 3,395, = 3,595,641 National Statistics Office database to determine number of employees by sector and size distribution Assumptions and Risks Assumptions Continued strong political commitment and support for SME development Continuous implementation of the MTPDP and SME Development Plan Risk Deteriorating macroeconomic environment Increase SMEs' share in value added. The government s target is an increase from 32% in 2002 to 40% in 2010 based on growth projections in the MTPDP. Government data is not available yet. National Statistics Office database to determine changes in value added (census) by SMEs and size distribution Outcome Improve the enabling environment for SMEs and facilitate greater access to finance The Medium Term Philippine Development Plan (MTPDP) builds on a benign external environment to support annual real gross domestic product (GDP) growth of at least 6%. Increased SME lending at SB Corporation (a 250% increase in wholesale lending and a 300% increase in retail lending) by Aggregate lending target through SB Corporation is at least $7 million under the first $10 million, in the first 18 months after the first withdrawal. Growth rates of real GDP were 5.3% in 2006, 7.1% in 2007, 3.7% in 2008 and 1.1% in No increase in SME lending, however, outreach, efficiency and quality of SME lending at SB Corporation have improved. Achieved Data from SB Corporation and selected participating financial institutions for the SB Corporation component Assumptions Continued strong political commitment and support for SME development and implementation of the SME Development Plan Delay in passing the enabling legislation for the CIB Delay in release of budget funds for the PBR Risk Deteriorating macroeconomic environment that make financial institutions more cautious in SME lending Increased SME lending in terms of SME borrowers and SME lending volume at participating financial institutions (PFIs) under the partial credit guarantee (PCG). Not available yet Data from the selected participating financial institutions for the PCG component Credit information bureau (CIB) and CIB will be established in Review missions to assess