DTI urges state-run banks to intensify lending to SMEs

The Department of Trade and Industry (DTI) will ask state-run banks to intensify lending to small and medium enterprises (SMEs) after the World Bank said local financial institutions are not meeting the demand of SMEs.

A report published by the International Finance Corp. (IFC), a unit of the World Bank, showed that the volume of unmet loan demand for SMEs is between P67 billion and P180 billion.

“I will talk to the two government financial institutions (Land Bank and DBP) and convince them to increase their lending,” Trade Secretary Peter B. Favila said in an interview.

According to Favila, the government cannot allocate sufficient money from the national budget to bankroll small businesses given the country’s fiscal position.

“Maybe when we balance our budget by next year we can have more government initiated programs,” Favila said.

Aside from the two GFIs, Favila who was a former banker, said he will likewise try to convince other banks to increase their lending allocation for SMEs.

However, a leading business group said banks are not willing to lend to SMEs given the big risk they pose in addition to being more costly.

Sergio Ortiz-Luis Jr., honorary chairman of the Philippine Chamber of Commerce and Industry (PCCI) said it is more costly to lend to SMEs because the processing required to approve a small SME loan is the same as that of a big corporate client.

As difficult as it is now for SMEs to obtain a bank loan, Ortiz Luis warned it will get worse once the Congress passes a bill that will create a credit bureau.

“The creation of the credit information bureau will make it harder for SMEs to borrow money from banks,” Ortiz-Luis said.

More than 90 percent of businesses operating in the country are classified as SMEs. A business is considered an SME if the assets are between P3 million to P100 million and has 10 to 200 workers.

According to Ortiz-Luis, of the 800,000 SMEs, only 200,000 are qualified to borrow from formal financial institutions. Should the credit bureau be implemented, he said the number would go down significantly.

The former banker said this is because most SMEs still have not recovered from the Asian financial crisis. In the late 90’s the local currency plummeted against the dollar making dollar denominated loans more expensive.