SME lending A distribution problem

Recent newspaper reports have been full of reports about contrasting reaction to the Magna Carta
for Micro Small and Medium Enterprises or the MSME law. Consider the following statistics.
The banking sector loan portfolio has increased by 255% from 2001 to 2012. The micro-small
portfolio increased by 30% and the medium portfolio by 144% in the same period.
Understandably, the viewpoint will depend on who is doing the advocacy.
Exporters, on one hand, are seeking full implementation of the mandatory lending to MSMEs,
saying several banks are found around the law. The Philippine Exporters Confederation, Inc. or
PhilExport is asking the legislative oversight committee of Congress to plug loopholes in the
implementing rules and regulations (IRR) of the law, which requires banks to allocate 10% of
their credit portfolio for SMEs, 8% to small and 2% to medium. According to PhilExport, the
penalty for non-compliance has been graduated for partial compliance such that the final amount,
especially for the big banks, is an absurd amount. This has resulted to banks simply skirting
compliance with the law by paying a measly fine.
The other side is amply discussed by the Chamber of Thrift Banks (CTB), which represents the
savings and thrift banks of the country. CTB claims that a number of member banks find it
difficult to comply with the required credit allocation because MSME is not its niche market.
The government is asked to provide a window for other alternative compliance so that under
complied banks will not be heavily burdened by penalties. CTB likewise proposes a general
compliance by banks to the mandatory credit allocation provision, with no distinction as to
micro/small or medium.
Interestingly, the Bangko Sentral ng Pilipinas, at least through one of its Deputy Governors, has
taken the position urging lawmakers to consider options other than mandatory lending. The BSP
argues that mandatory lending could lead to forced loans not meeting prudential requirements.
Instead, the BSP has called for creating or strengthening the existing guarantee scheme for
MSMEs. It also asked for the effective implementation of the Credit Information System Act, as
well as intervention that will make MSMEs themselves more marketable as they are organized
into supply chains. MSMEs are also urged to do proper bookkeeping and to have proper records
so that they become more readable to creditors.
Mandatory lending is always debatable with the arguments representing the collision between
advocates for free market forces and those that insist on affirmative action. The former says
money will flow freely if there is real demand and will be provided by the proper party according
to its capacities. The latter says trickle down happens so slowly that intervention is needed if the
vision is to accelerate funds flow to a sector that is rationed out under normal market forces. This
is the so-called market failure argument.
In essence, SME lending is a distribution problem. We all know that the financial system is very
liquid such that the BSP is already starting to introduce policy tools to mop up excess liquidity.
And the demand is absolutely there. Following are various estimates of the supply and demand

gap from different sources: DTI P100B, Neda-PIDS Scholars P130B to 270B, IFC USD
2.5B; PhilExport P70B.
There is an SME market out there and what is necessary is to build a distribution channel that
will make funds accessible to them. Access means availability of supply of quality financial
services at reasonable costs for the market players. The dimensions of access include the
following: (a) reliability, finance available when needed/desired; (b) convenience, ease of getting
to the supplier of funds; (c) continuity, finance accessible repeatedly based on need; and (d)
flexibility, the product tailored to the requirements of the client.
We need a distribution network that will solve specific constraints like transaction cost, fixed
costs in intermediation, economies of scale and regulatory constraints. We need a system that
truly cares and believes in the economic majesty and the financial inclusiveness of lending to the
SMEs. Banks as fund suppliers must learn to specialize because the SME market is a unique
target sector. An all-in-one lending framework or a cookie-cutter strategy for SMEs will only end
up being shorthanded. There has to be a dedicated organization that is set up physically and
spatially to reach the SMEs where they are. And even the processes involved must be suited to
the characteristics of the sector.
The policy challenge, therefore, must be to provide not just penalties, but incentives to
organizations willing to invest in this dedicated distribution channel. Regulators and policy
makers must reward those who are willing to provide such services, because even if such lending
activities are sustainable in the long run, it is obviously initially expensive. Creating the
distribution network involves setting up in places near and far so that the financial access is truly
made available to the end user. The rewards to the economy of confronting this challenge can
leapfrog the objective of achieving equitable growth for all.