Proposal for risk sharing in compulsory lending

The head of the Bank of the Philippine Islands (BPI) said last week that a risk-sharing arrangement between the banking sector and the government could facilitate mandatory lending to farmers and small businesses.

Speaking at the Manila Times Online Business Forum, BPI President and CEO Teodoro Lemkaoko noted that there has been a lot of discussion about how lenders can help the agriculture sector and micro, small and medium enterprises (MSMEs).

“[I]If you listen to the Governor of the Central Bank of the Philippines (BSP) [Felipe] Medala…Two days ago, he stated very clearly that the worst way is to do mandatory lending and pass a law that says you have to lend X to Sector X. He said it very clearly, and I agree with him,” he said.

Limcaoco recommended a comprehensive strategy that includes providing the necessary infrastructure as well as risk sharing since the amount of money that banks need to lend is very large.

“The fact is, and a lot of people don’t realize — a lot of people probably realize but don’t want to accept — is that banks, when we lend, we also have to lend viable projects that are credible and worthwhile, ‘We don’t lend our money, we lend yours, and so We want to be able to collect it,” he said.

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Bank lending to the agriculture and agrarian reform sectors, as well as to MSMEs, remains below the minimum level mandated by law based on Billing Settlement Payment (BSP) data.

As of December 31, 2021, the banking system allocated 851.75 billion pesos to the agricultural-wage sector, an increase of 19.36 percent over the previous year. The combined agrarian and agrarian reform allocation, at 10.65 percent of the total loanable funds of 7.99 trillion pesos, was well below the 25 percent set by Republican Act (RA) 10,000, or the “Agrarian Reform Credit Act of 2009.”

Meanwhile, RA 6977, or “Magna Carta for Micro, Small and Medium Enterprises,” has called for 875.56 billion pesos to be funded for MSMEs as of the end of March this year, but only 446.98 billion pounds have been allocated. The amount was well below the minimum required 10 percent at just 5.11 percent of the total loanable funds of 8.75 trillion pesos in the first quarter of this year.

Despite this, Limcaoco claimed that the banking industry was very beneficial to its target sectors and made an effort to comply with the law. For BPI alone, he said, the lender was about 65 percent committed to mandatory agricultural lending.

“While we are required to lend 10 percent of our loanable money in this sector, we are now lending six and a half percent of that, and…that’s about 150-120 billion in this sector,” he said.

He went on to say that if the government wanted to drive compliance, risk-sharing would probably be the best way to use it.

“[L]Others are working on a risk-sharing arrangement where the banks take on some of the risk but also with the encouragement of the government so that we are allied together, and we are not forced to lend to potentially unviable projects,” he said,

He added that in case of non-compliance by banks, they are punished, and the fines paid go to a government-managed fund aimed at helping the same sectors.

“So it helps, it’s going everywhere anyway. So we just need to manage risk because as banks we also have to be careful about our lending because we’re not lending our capital, we’re lending your deposits,” Limcaoco said.

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