Collateral not necessary for small borrowers - BSP

MANILA, Philippines - The Bangko Sentral ng Pilipinas (BSP) does not require banks to ask collaterals from their microfinance borrowers but has been promoting the cash-flow and character-based lending methods in the granting of loans. 

“Actually for microfinance, we are very explicit that there is no need for the usual collaterals. Some collateral substitutes are allowed like group loans, peer support or whatever other types of collateral substitutes,” said Pia Roman Tayag, head of the BSP’s Inclusive Finance Advocacy Staff.

A BSP circular defines microfinance loans as small loans granted to the basic sectors and those provided to the poor and low-income households for their microenterprises and small businesses.

Basic sectors refer to disadvantaged sectors of the Philippine society including farmers, fisherfolks, workers in the formal and informal sectors, victims of calamities and disasters, among others, according to the Social Reform and Poverty Alleviation Act of 1997 (RA 8425).  

“Banks have seen they don’t need the collateral as long as they know and understand the character and the cash-flow of the borrowers. But of course it depends on the banks; it’s their risk appetite, it’s their own credit policy so that is something for them to determine,” she said.

However, Tayag said the BSP gives the banks the flexibility to determine their own lending method for the small and medium enterprises (SMEs) depending on their credit underwriting.

“If you look at the BSP policy, there is no black and white that requires banks to ask for collateral. What we require banks is to have a very clear credit underwriting process where they can really accurately measure the re-payment capacity of the borrower. So it is up for the banks to define that,” she said.   

Tayag said banks can innovate how they can better serve the SME market.

She shared that some of the universal banks are using the credit scoring technique for SMEs, while some rural banks are pilot-testing the method.

“The credit scoring techniques enable banks to lend to SMEs in a sound and prudent manner,” she noted in a forum on MSMEs development held at the Asian Institute of Management. “We build up our capacity to understand various SMEs credit scoring models.”

Tayag identified various initiatives undertaken by the BSP geared for the development of the SMEs.

These include, among others, monitoring of compliance to mandatory credit allocation to SMEs, building internal capacity to appropriately regulate lending to SMEs and providing targeted incentives for banks to address constraints to access to finance.