Bank lending to MSMEs drops 17% in 2020
MANILA, Philippines – Bank lending to micro, small and medium enterprises (MSMEs) fell 17% to 480.5 billion pesos in 2020, from 579.13 billion pesos in 2019 as the sector was hit by closures massive due to strict mobility and quarantine restrictions amid the pandemic, according to the Bangko Sentral ng Pilipinas (BSP).
The amount, which only amounted to a 5.71 percent compliance rate, continued to be below the 10 percent threshold required by Republic Act 6977 or the Magna Carta for MSMEs.
The law obliges banks to allocate 8% of their total loan portfolio to micro and small enterprises and 2% to medium enterprises.
BSP data showed that the total credit allocation of the banking system to micro and small enterprises decreased by 18.5% to 186.12 billion pesos in 2020 from 228.36 billion pesos in 2019 and is remained below the prescribed eight percent, as it represented only 2.21 percent compliance. .
Likewise, funds allocated to medium-sized enterprises fell 16 percent to 294.38 billion pesos from 350.77 billion pesos. This resulted in a compliance rate of 3.5%, exceeding the required 2%.
The industry’s total loan portfolio increased slightly by 3.3% to reach 8.42 billion pesos in 2020, from 8.15 billion pesos in 2019. This means that allocations for the MSME sector are expected to have increased. reached 841.26 billion pesos.
MSMEs play an important role, contributing 35.7 percent of the total value added of the economy and accounting for 99.5 percent of all establishments. The sector employs 62.8 percent of the total labor force.
However, MSMEs are unable to reach their full potential due to difficulty in accessing credit and finance, especially now that banks are risk-averse due to uncertainties caused by the COVID-19 pandemic.
PASB has adopted regulatory relief measures to reduce the financial burden on MSMEs. The Monetary Board approved the temporary relaxation of the credit risk weight assigned for loans to MSMEs in the calculation of the risk-based capital adequacy framework to 50% from 75%.
A lower credit risk weight would allow banks to lend more to the MSME sector than reserving the amount to comply with capital requirements.
The regulator also approved the inclusion of loans to MSMEs within banks’ compliance with reserve requirement ratios to ensure adequate liquidity and credit in the financial system.
The BSP reduced the RRR of universal and commercial banks by 200 basis points and of medium and small banks by 100 basis points last year. It also reduced the minimum liquidity ratio (MLR) for autonomous medium and small banks to 16 percent from 20 percent to free up more funds for loans.
The Monetary Board also cut interest rates by 200 basis points this year, taking the overnight repo rate to a historic low of 2%.
According to the BSP, action is needed to mitigate the risk of financial sector volatility in light of ongoing global developments. It would also reduce borrowing costs for affected businesses and households.