Bank loans to MSMEs expected to rise, but remain under mandated 10% quota

BANK LOANS to micro, small, and medium enterprises (MSMEs) are expected to rise next year but remain under the mandated quota of 10% of lenders’ total loan portfolio as estimating credit risk for small businesses continues to be difficult.

“Booking sufficient MSME loans would be a challenge to a number of banks, especially those not really targeting or just beginning to target this segment. Estimating the credit risk of this segment is inherently difficult given the lack of information or reports,” University of the Philippines Los Baños economics senior lecturer Enrico P. Villanueva said in a social media message.

In the six months through June, loans extended by the banking industry to small businesses amounted to P461.387 billion, just 4.71% of their total loan portfolio of P9.8 trillion.

This was 3.1% higher than the P447.69 billion in loans they extended to the sector in the same period in 2022.

Mr. Villanueva added that banks are likely to continue paying the penalty for non-compliance.

Republic Act No. 6977 or the Magna Carta for MSMEs mandates banks to allocate 10% of their credit portfolio for small businesses to boost the sector — 8% for micro and small enterprises (MSEs) and 2% for medium-sized enterprises.

However, banks have long opted to incur penalties for noncompliance instead of taking on the risks associated with lending to small firms.

Mr. Villanueva added that banks are just starting to build their risk models for the small businesses sector and that delinquency rates for businesses are still difficult to gauge.

“We are not saying or concluding that their default rate is higher, it is just harder to estimate their capacity to pay or tendency to default,” he said.

However, MSME loans could ramp up when rates begin to ease, he added.

“If rates remain high, banks may maintain their stricter credit standards and not lend much, or lend very selectively. Credit standards may ease if rates fall,” Mr. Villanueva said.

Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort added in a Viber message that MSME loans could also be boosted if inflation eases further next year.

MSME loans could grow faster than corporate loans but slower than consumer loans, Mr. Ricafort said. He added that small business borrowings could still grow by double digits or by more than 10%. 

Banks’ loans to small businesses could still be below the 10% quota as these are no longer allowed to be part of the reserve requirement, he added.

“Now that new MSME loans are no longer part of the reserve requirement calculation for banks since June 30, 2023, but effectively offset by lower reserve requirements since then, the said loans could still be below the quota set by regulators, unless there is a significant increase in demand for MSME loans,” Mr. Ricafort said. — Aaron Michael C. Sy

Neil Banzuelo

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