enhancinggpp the philippine credit guarantee program for msmes · – guarantor has a role as a...

Enhancing the Philippine Credit g ppGuarantee Program for MSMEs

Presented by:BENEL P. LAGUA

President and COOPresident and COO

Presented During the Workshop on”SME Credit Guarantees in Asia-Pacific Region

June 16-18, 2010.

Hangzhou, China

Presentation Outline: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 CGCs4. Lesson from Studies on CGCs

5. SBC’s Credit Guarantee Program: Goals, Strengths, and WeaknessesWeaknesses

6. Credit Guarantee System in Asian Counterparts

7. Obstacles in the Development of an Effective Credit Guarantee System in the Philippines

8 C l i d R d i8. Conclusion and Recommendations

Overview of the PhilippinesOverview of the Philippines

• Geography:• 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 (1st Quarter 2010) is estimated at 93.3 million

G bl f h h l• Government: Republic of the PhilippinesNew Administration by end-June 2010under President-elect Benigno Simeon C. Aquino III

• Economy as of 1st 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 992Per Capita GNP: P23,992– Inflation rate: 3.85%

Overview of Philippine MSME SectorOverview of Philippine MSME Sector

Tool for poverty alleviation through employment• Tool for poverty alleviation through employment opportunities for the poor

• Comprise 99.6% of all registered businesses

E l 70% f t t l l b f• Employ 70% of total labor force

• Contribute 32% to GDP• Contribute 32% to GDP

• Mainly domestic-orientedy

• Account for 60% of Philippine exports

Overview of Philippine MSME SectorOverview of Philippine MSME Sector

• Access to finance commonly pointed out as major obstacle to growth and development due to:

– High transaction cost of small loansg

– Perception of high risk of MSME lendingp g g

– Lack of traditional collateral demanded by banksLack of traditional collateral demanded by banks

– Perception of low profitability of SME lendingPerception of low profitability of SME lending

RA 9501: Magna Carta for MSMEsRA 9501: Magna Carta for MSMEs

Magna Carta for SEs Magna Carta for SEs RA 6977 as amended by RA 6977 as amended by RA 8289 in 1997RA 8289 in 1997RA 8289 in 1997RA 8289 in 1997

Magna Carta for MSMEs Magna Carta for MSMEs RA 6977, as amended by RA 6977, as amended by RA 9501 i 2008RA 9501 i 2008RA 9501 in 2008RA 9501 in 2008

RA 9501: Magna Carta for MSMEs (2008)RA 9501: Magna Carta for MSMEs (2008)

D fi iti f MSME• Definition 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 MSMEsMandatory 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 asAmended Charter of the Small Business Corporation (also known as the Small Business Guarantee and Finance Corporation)

SBC and Its Credit Delivery StrategySBC and Its Credit Delivery Strategy

A ti f RA 6977 i J 1991• A creation of RA 6977 in January 1991

• “Primary responsibility of implementing comprehensive• Primary responsibility of implementing comprehensive policies and programs to assist MSMEs in all areas, including but not limited to finance and information gservices; training and marketing.” (Sec. 11)

C d l 6 992• 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

Overview of Philippine Credit Guarantee Systems

Philippines’ GFSME (Guarantee Fund for SME) in 1984-1999 (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

F d b l f d 2009 i P931 M• Fund balance as of end-2009 is P931 M


Vision:

“The h io fo“The champion for a globally competitive and

viable MSME sector.”viable MSME sector.


Mission:

“De elo d o ide“Develop and provide financial services and

capacity buildingcapacity building programs in a

progressive and sustainable manner to

empower MSMEs as viable businesses ”viable businesses.”


Cl ifi i f MSME B “O i f ll”Classification of MSME Borrower: “One size not for all”

• Start-up: newly established enterprise with no credit / business track recordp y p /

• Graduation Micro: economically active; willing to register as an enterprise; track record of at least one year; credit track record with an MFI; with sometrack record of at least one year; credit track record with an MFI; with some tangible business assets

P B k bl li it d b i t k d d i li it d t t• Pre-Bankable: limited business track record and size; limited 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

SBC and Its Credit Delivery Strategy:SBC and Its Credit Delivery Strategy:The Incubation-Graduation Model

N

Bankable SMEs

Near Bankable

SMEs

Graduating Micros

Pre-Bankable

but Viable MSMEs

Start-Up

Micros

C edit

Pre-Enterprise Micros

With MFI capability

building support

With enterprise registration

support

Direct Lending

for MSMEs

Credit Guarantees

for SMEsWholesale Lending for SMEs

Wholesale Micro-Finance

SME Wholesale Lending SME Wholesale Lending SME Wholesale Lending SME Wholesale Lending

15,834 16,10018,000

12,086

14,451

14,000

16,000

s

6 871

9,602 10,000

12,000

on p

esos

4,413

6,871

6,000

8,000

in m

illio

795 2,135

0

2,000

4,000

02002 2003 2004 2005 2006 2007 2008 2009 2010

Year

Microfinance WholesaleMicrofinance Wholesale

3 3073,406

3 00

4,000

2,239

3,307

3,000

3,500

sos

1,326

2,239

2,000

2,500

lion

pes

322680

,

1,000

1,500

in m

ill

16 97 199 322

0

500

2002 2003 2004 2005 2006 2007 2008 2009 2010Year

MSME Retail LendingMSME Retail Lending

3 6093,968 4,021

4 0004,500

536 3,107

3,609

3,0003,5004,000

sos

687 440

2,0002,5003,000

llion

pes

257

766 1,0001,500

in m

il

257

0500

2002 2003 2004 2005 2006 2007 2008 2009 20102002 2003 2004 2005 2006 2007 2008 2009 2010Year

Credit GuaranteesCredit GuaranteesCredit GuaranteesCredit Guarantees

1 603 1,686 1,7021 8002,000

1,2241,437

1,603

1,4001,6001,800

sos

679908

8001,0001,200

llion

pes

119391

400600800

in m

il

0200

2002 2003 2004 2005 2006 2007 2008 2009 20102002 2003 2004 2005 2006 2007 2008 2009 2010Year

Lending Performance by Lending Facility 2002 20092002-2009

Guarantees 7%

Microfinance 13%

7%

Wholesale

Retail 16%

64%

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

SBC’s Performance IndicatorsSBC s Performance Indicators

• Assets

2001 2009

• Assets

• Retained Earnings

P2.05 billion P4.90 billion

• Retained Earnings

• Cumulative EBIT

P114.39 million P558.113 million

Cumulative EBIT(2001-2008) P492.56 million

• Dividends paid (since 1991)

P510.58 million

( )

Studies on Credit Guarantee Schemes(ADB, 2006; Levitsky, 1997)

• 85 countries operate credit guarantee schemes• 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;– 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 from 30% ad t e costs et by a d ect spe d g co t e t o

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)since 1972, and Malaysia since 1971)

• ACSIC- Asian Credit Supplementation Institutions Confederation, composed of CGCs in Japan Korea Malaysia Philippines Indonesiacomposed of CGCs in Japan, Korea, Malaysia, Philippines, Indonesia, India, Taiwan, Thailand, Sri Lanka, and Nepal.

Lessons from Studies on CGC’sLessons from Studies on CGC s

• Mixed results in terms of failure and success of guarantee schemes• 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 mattersSize 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.


S b t ti l l f t h ld t i t t i th t• Substantial volume of guarantees should create interest income that 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 1y ,

• Credit guarantee schemes should be open to at least several competing commercial banks that are considered financially soundcompeting commercial banks that are considered financially sound, adequately staffed, and have reasonable loan portfolio levels.


Sample checks on additionality should be made every 2• 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-upsonly a small minority of start ups.

• Appropriate range for guarantee in liberalized market is 60% 80%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.


L t h b i ff t fi i l• Loan guarantees have a more benign effect on financial market performance than providing lenders with cheap, subsidized funds.subs d ed u ds

• Awareness about moral hazard—an important lessonp– Banks and borrowers may have less incentive to monitor and

repay loans– Well-designed and implemented schemes can control costs andWell 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.ot a e bad ba s e d se y

SBC’s Credit Guarantee Program: GoalsSBC s Credit Guarantee Program: Goals

E b k t l d t MSME th t d t il t th i• Encourage banks to lend to MSMEs that 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 g g ( gintervention)

• More MSME borrowing from banks (shift from informal to formal• 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)

SBC’s Credit Guarantee Program: GoalsSBC 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 guaranteeswould otherwise be impossible without guarantees.

• credit guarantees provide learning opportunity in the• credit guarantees provide learning opportunity in the long-term, making banks understand MSMEs better and giving them confidence in the profitability of MSMEand giving them confidence in the profitability of MSME lending even with the absence of guarantees.

SBC’s Credit Guarantee ProgramSBC s Credit Guarantee Program

Operates on a basis of risk sharing with 58 accredited• Operates on a basis of risk-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 biggernon repayment of loan with SBC taking on the bigger bulk of the risk of the fee

h h h l f• Major enhancement in the program is the application of a risk-based lending framework– Evaluation of loan applications is purely based on risk factors pp p y

pertaining to the borrower– Use of a borrower risk rating (BRR) system, a tool that helps

control credit risks


Types of Guarantee FacilitiesTypes of Guarantee Facilities

• Guarantee for Gearing-Up Enterprises (SME-GEAR)A t f ilit f l l l t d b h d ll t lA guarantee facility for clean loans or loans not covered by hard collateral

whether real state or chattel.

• Guarantee for Growing Enterprises (SME Grow)• 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 recoveriesSBC does not share on future collateral recoveries.

• Guarantee for Gainful Enterprises (SME-GAIN)A guarantee facility where the guarantee cover is on the entire loanA 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.


Guarantee CoverSME-GEAR SME-GROW SME-GAIN

G t C 70% f l t b t 70% f th d 80% f l t b tGuarantee Cover 70% of loan amount but not to exceed P6.0 M

70% of the unsecured portion of the loan amount but not to exceed P6.0 M

80% of loan amount but not to exceed P10.0 M

Guarantee FeeBorrower Risk Rating Guarantee Fee (p.a.) Monitoring Requirement

1 1 % Annual BRR review

2 1.25 %

3 1.5 % Annual BRR review plus semi-annual CI4 2 %

5 and up 3 % Semi-annual BRR reviewincluding CI

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.q y y

2. It is risk-based.

3. It is proactive.3. It is proactive.


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

l t b h i f dit b k d/ MSMElater behavior of creditor bank and/or MSME borrower

• Continued guarantee cover except on ff cases:• Continued guarantee cover except on ff cases:• Late or non-repayment of guarantee fee

Loans released after occurrence of default• Loans released after occurrence of default• Imperfect loan documentation


2 It i i k b d2. It is risk-based.• Credit evaluation based on borrower risk rating• Credit evaluation is enterprise-based and not portfolio-based inCredit 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 borrowers)better 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 assetspp y p j• 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 manage loans (70% to 80% guarantee p p y g ( gcover is ideal)


2 It is risked based2. It is risked-based.

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 institutionsp

• BRR System as a scorecard– Evaluation of loan ad guarantee applications is purely based on risk factors

pertaining to the borrowerpertaining 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

Ad i i i f• Administration—refers to owners or management• Market—refers to market condition for specific products/services• Production—refers to ability of enterprise to meet market demands


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

SBC’s Credit Guarantee Program: WeaknessesWeaknesses

1. Weak structural support.f f• Fragmentation. Lack of rationalized approach to setting up of new

guarantee structures• Supervision by Bangko Sentral ng Pilipinas (BSP) using bank

regulatory structureregulatory structure• No sovereign guarantee cover

2. Limited resources resulting in limited impact2. 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

f ltil t l i (ADB KffW d IFAD)from multilateral 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 (1984 1999) out of a• In contrast, GFSME had P6.17 B in guarantees (1984-1999), out of a seed fund of only P300 M. Main difference is LACK OF SOVEREIGN GUARANTEE.

SBC’s Credit Guarantee Program: gWeaknesses

4. SBC is forced to target a low leverage ratio of 3x

5. Philippines has other guarantee programs that are not necessarily harmonizedy• Philippine Export-Import Credit Agency (PhilEXIM)—for exports• Credit Surety Fund Sponsored by BSP—for small cooperatives• Agricultural Guarantee Fund—for agriculture

ConclusionConclusion

1 G t t i th Phili i i t d1. Guarantee system in the Philippines is at a crossroad.

2. Challenge of the new Government is to have the political will beef g pup resources and implement reforms.

3 Guarantee operations are at best break-even operations in the3. Guarantee operations are at best break 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.guaranteed more than make up for the subsidy.

4. Leverage is the key.

5. Credibility is important. VALUE OF SOVEREIGN COVER.

Conclusion6. Guarantee programs are “risk” programs. Policy-makers must

show willingness to take a “hit” Fiscal deficit situation in theshow 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 banks should be g gdifferent from rules in supervising guarantee operations.

9 Optimism that the new government will be bold enough to9. Optimism that the new government will be bold enough to reinvigorate the Philippine credit guarantee system.

RecommendationsRecommendations

For the enhancement of existing credit guarantee schemes: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 enhancementcoming 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 timaking it attractive to banking institutions

THANK YOU!

blagua@sbgfc org [email protected]

enhancinggpp the philippine credit guarantee program for msmes · – guarantor has a role as a...

Documents