[ad_1]
The Bayanihan to Recover as One Act reserved an allocation of P55 billion to provide low-interest loans to sectors severely affected by the coronavirus pandemic. Of this amount, 18.4725 billion pesos are for the Land Bank of the Philippines, 10,000 million pesos for Small Business Corp. (4,000 million pesos for MIPYMES, cooperatives, hospitals and Filipino workers abroad and 6,000 million pesos for The tourism); P6 billion for the Development Bank of the Philippines; and P5 billion for Philippine Guarantee Corp. The remaining P15.5275 billion is a reserve fund to be injected into Landbank and DBP as additional capital.
While this seems like good news, keep in mind that only about P40 billion is earmarked for the loan program. As I have written in another column, is this amount sufficient given the dire state of the economy with most small businesses paralyzed? Also, the delivery and distribution system solely through government financial institutions (GFIs) is operationally efficient.
Lending to SMEs is primarily a distribution problem. Limitations such as transaction costs, fixed brokerage costs, economies of scale, distance, and regulatory hurdles are abundant. A large part of the flow of funds is handled by intermediaries, which is dominated by private financial institutions. It is important to use existing distribution channels that are close to customers to reach them efficiently.
When the U.S. Congress passed its Coronavirus Relief, Relief, and Safety Act (CARES), it opened several windows for eligible small businesses and nonprofits, veteran organizations, tribal businesses, and individuals who work for own account and independent contractors. It had an allocation of $ 670 billion for the Paycheck Protection Program. But what stands out is that the Small Business Administration (SBA), charged with implementing the program, will delegate authority to SBA-certified lenders to process the application. In addition, depository institutions and credit unions insured by the federal government, as well as institutions of the agricultural credit system, will be available to apply as approved lenders for the program.
In other words, the SBA broadens its scope by accrediting private sector financial institutions that have excess liquidity available for loans. The funds allocated by Congress will multiply due to leverage effects and should reach troubled companies in a timely manner.
SBA certified lenders will be given delegated authority to quickly process loans. The SBA guarantees 100% of the outstanding balance, and that guarantee is backed by the full faith and credit of the United States.
Additionally, the SBA waives all warranty fees, including initial and annual service fees. Lenders do not charge applicants fees. The SBA will pay lenders fees for processing loans at graduated levels: five percent for loans of no more than $ 350,000 and less than $ 2,000,000; and one percent for loans of at least $ 2,000,000. This is an interest subsidy and is higher for smaller parts.
It is not about discrediting government financial institutions. By way of outreach, this writer has been active in some of these institutions and yes, they have dedicated people who are driven by mission and development. My concern is that direct loan carrying capacity, especially to small core businesses, could be compromised. The risk rules from a regulatory perspective remain unchanged. And a direct loan program is limited to the amount assigned.
Another concern about GFIs is that they are supervised like any other institution and there may be restrictions in terms of non-compliance with certain maturity limits, loan defaults, capital adequacy, etc. In other jurisdictions, government policy banks are subject to more benign situations. regulatory standards that appreciate its development mandate. We are in pandemic crisis mode and the development momentum of our GFIs must be strengthened. In the case of the two major government banks, there is unwritten pressure to compete as part of the major banks in the country and this means closely marking the metrics of the regular banking system.
Most economies have provided direct subsidies to help their small businesses. South Korea, for example, has allocated 3.2 trillion won to 2.9 million eligible small businesses or self-employed workers. They will receive 2 million won each in cash payments. Japan offers cash grants of up to Y2 million for companies experiencing 50% or more drops in monthly revenue year-over-year. Sole proprietors, including the self-employed, will also be eligible for a maximum of Y1 million in grants.
We cannot afford direct subsidies on this scale as a country. But we can expand the reach of our limited funds by multiplying them through loan guarantees. Our Asian neighbors have tested credit guarantees as they helped to quench bankruptcies during episodes of financial crisis and calamities in the past. Credit guarantees will take advantage of resources that may be idle in private financial institutions. It is a catalyst. Companies that cannot apply for loans without the guarantee system become bankable. And for the financier, the risk weight should be lowered due to collateral coverage.
This is the right time to explore a more aggressive guarantee program that takes calculated risks and takes advantage of the strength of the financial system, our private institutions. The problem with past guarantee initiatives in the country is the unwillingness of policies and regulation to absorb losses. Guarantee programs are the second best economic solutions that avoid direct subsidy, and their success must be measured by the economic activity generated, the jobs saved and the lives sustained. The program must be willing to absorb risks.
Benel D. Lagua was Executive Vice President and Director of Development for the Development Bank of the Philippines. He is an active member of FINEX and an advocate for risk-based lending for SMEs. The opinions expressed in this document are his own and do not necessarily reflect the opinion of his office or FINEX.
[ad_2]
