Local bank lending to MSMEs remains sluggish

Micro, small and medium enterprises (MSME) continued to get a small fraction of loans from banks in the second quarter, as both lenders and borrowers retreated amid economic fallout from a prolonged conflict in the Middle East.

Loans to MSMEs accounted for 4.48 percent of the local banking industry’s total lending portfolio as of end-June, slightly smaller than the 4.53 percent share in the prior quarter, data from the Bangko Sentral ng Pilipinas (BSP) showed. This was also way below the prescribed ratio of 10 percent.

In peso terms, P572.74 billion of the banking sector’s P12.8-trillion loan portfolio went to MSMEs. This was a tad smaller than the P573.82 billion in credit that the sector received in the preceding quarter.

Under the Magna Carta for MSMEs, banks must allocate 8 percent of their portfolio to micro and small businesses. Also, 2 percent must be extended to medium-sized enterprises.

The lending quota was in effect for a decade starting in June 2008. But many banks were not compliant, opting to just pay the penalties.

Despite the expiration of the mandated credit allocation in 2018, the BSP continues to monitor bank lending to MSMEs.

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The sector makes up about 99 percent of local businesses and provides around 63 percent of employment.

“Banks remain prudent in extending credit amid a slower economic environment and continued credit risk considerations,” said John Paolo Rivera, senior research fellow at Philippine Institute for Development Studies. “MSMEs are also recovering from higher financing costs and softer demand, which may have tempered loan demand.”

Jonathan Ravelas, senior adviser at Reyes Tacandong & Co., said: “The story here is not a lack of liquidity but a lack of bankable borrowers … Until constraints on credit information, collateral and financial records are addressed, MSME lending will continue to lag overall loan growth.”