"Risk-based" lending, as opposed to "collateral-oriented" banking, means that the borrowers’ credit worthiness is measured not only by their capacity to put up collateral but primarily on their ability to meet the four basic requirements for business success, namely: re-payment capability, managerial ability, production capacity and prevailing market conditions.
Starting this month, SB Corp. will pilot-test its Borrowers’ Risk Rating (BRR) system in assessing the credit worthiness of their SME borrowers.
Developed with funding and technical assistance from the Asian Development Bank (ADB), the BRR system uses the "scorecard method" in computing the prospective SME borrower’s over-all "credit standing" and "credit risk" rating.
Prospective borrowers will be "graded" by the Corporation’s credit investigators using a standardized "test sheet," with one being the most satisfactory rating and 10 representing the worst credit risk.
A five rating is considered the "passing" mark. The interest rate and terms of the loan will therefore vary depending on how low the SME loan applicant scores in the test. For example, a SME with a "one" or excellent credit rating will be enjoying preferential loan terms while those graded "three" or "four" will have to pay higher interest rates.
SB Corp. president and chief operating officer (COO) Benel Lagua said that they are instituting this new approach in response to various comments that they have received from SMEs.
"One of the most common complaints of our SMEs today is that they do not have collateral that they could use to borrow from banks. For their part, banks generally want to lend to small businessmen.
However, because of the scarcity of credit information on SMEs, they are hindered from doing so. Therefore, most of our small entrepreneurs turn to their friendly neighborhood ‘5-6’ for capital," Lagua said.
He added that SB Corp.’s BRR system would hopefully encourage banks to change their orientation in SME financing from that of being collateral-oriented to one that is more risk-based.
The promotion of risk-based lending is just one of the current reforms being undertaken by SB Corp. in line with its mandate to provide easy credit access to SMEs.
Although the borrower risk rating method is already used in the Philippine banking system, it is largely limited to large borrowers and big corporate accounts.
And even with risk rating systems in place, the borrower’s ability to present collateral continues to be the major factor in influencing credit approval decisions in the Philippine banking system.
"With the BRR system, what the corporation is really doing is adopting the credit scoring technology used by banks for large borrowers and simply apply it to our small and medium-sized borrowers," Lagua said.