BSP comes thru again for small businesses and microfinance

LATE last year, the Bangko Sentral ng Pilipinas (BSP) extended for another three years the exemption on micro and small- enterprises from the submission of documentary requirements to secure bank loans. Though it received some publicity, I still think this very commendable move is underrated especially considering its impact to small businesses nationwide. I felt compelled to revisit this particular circular and stress its overall effect to the industry.

To be more specific, here are the wordings in its Circular 746: “Pursuant to Monetary Board Resolution No. 1911 dated December 19, 2011, Subsection X304.1 of the Manual of Regulations for Banks [MORB] and Subsections 4303Q.1 and 4312N.1 of the Manual of Regulations for Non-bank Financial Institutions [MORNBFI], as amended, [ the Bangko Sentral ng Pilipinas] has amended to extend the exemption granted to micro and small enterprises from the submission of additional documentary requirements on the grant of loans and other credit accommodations for an additional three years.” BSP Governor Amando Tetangco, Jr. was quoted as saying that such a move by the Monetary Board is aligned with the BSP’S long-standing thrust of providing support to micro and small-enterprises by assisting these institutions to gain greater access to credit from formal channels.

The extension would end on December 2014.

This is actually the third time such an exemption was extended. In 2008, the BSP granted micro and small enterprise borrowers an extension and previous to that, a two-year reprieve was granted to give small businesses enough time to organize their accounting and finances. The BSP had agreed on the exemption for a two-year transitional period for small enterprises capitalized at P3 million to P15 million within which they could take bank loans without being required to submit income tax returns. Prior to this, the BSP exempted microfinance enterprises capitalized at no more than P3 million, acknowledging that these entities did not have the capabilities to maintain books of accounts.

This move by the BSP should not be in any way construed as encouraging the circumvention of the government’s documentary requirements, especially the submission of the income tax returns (ITRS) as required by the Bureau of Internal Revenue (BIR). Requiring businesses to submit ITRS when entering into transactions with banks was intended to force businesses to clean up their books and pay the correct taxes. It was also intended to create a paper trail that could be used by the BIR for spot audits. Unlike the case of self-employed individuals and other small enterprises were reports of non- payment of income taxes are rampant, the BSP recognizes that the relationship of rural banks that engage in microfinance and their borrowers were based on trust and confidence, and the imposition of documentary requirement to these borrowers would only be a disincentive to borrow from banks.

Without being mandated to submit requirements like audited financial statements and/or income tax returns for them to secure loans from banks, this enables micro, small and medium scale enterprises to expand without being limited by their size compared to the big boys in the industry. It effectively levels the playing field.

Micro, small and medium scale enterprises provide so many jobs and a stable source of income to many Filipinos, especially in the rural areas. They are an integral part of the local economy. However, most of these small businesses lack the proper paperwork that prevents them from borrowing the capital they need from banks. Without a reliable source of funding for their expansion programs, these micro entrepreneurs would be treading on dangerous grounds.

What does this mean to rural banks engaged in microfinance?

The extension of the exemption would help these entrepreneurs obtain greater access to credit in terms of less documentary requirements. As of June 2011, banks with microfinance operations have outstanding loans to over 963,000 borrowers reaching over P7 Billion, or an average of P7,260 per microentrepreneur. Without being constrained to comply with the documentary requirements, expect this figure to further shoot up.

By definition, microfinance is the provision of a broad range of financial services such as deposits, loans, payment services, money transfers and insurance products to the poor and low-income households, and their microenterprises.

As of June 30, 2011, there were six microfinance-oriented rural banks with outstanding loans of P1.8 billion and 148 microfinance-engaged rural banks with outstanding loans of P3.8 billion.

According to the BSP, for three years in a row, the Economist Intelligence Unit Global Microscope on Microfinance has named the Philippines as the best in the world in terms of regulatory framework for microfinance and consistently in the top 10 out of 55 countries overall, which include other criteria such as supportive institutional framework and stability. This does not come as a surprise, considering the incentives granted by the BSP to promote microfinance in the country.

The BSP was mandated by the General Banking Law in 2000 to recognize microfinance as a legitimate banking activity, and to set the rules and regulations for its practice within the banking sector. The BSP has issued Circular 678 and 680 aside from Circular 683 that authorized rural banks to market, sell and service microinsurance products subject to certain prudential rules and regulations. Circular 680 allowed banks to offer micro- agri loans as credit not exceeding P150,000 to small farmers.