Development banking revisited

The Philippine economy depends heavily on small- and medium-sized enterprises, which account for some 90% of all businesses, contribute about 25% to the gross national product and provide jobs to over half of the total labor force.

Yet, important as they are, time was when SMEs did not readily have access to formal credit. Because they were considered very risky, costly and difficult to handle, most banks avoided lending to them.

It was against this backdrop that Planters Development Bank had its beginnings 41 years ago when its present majority shareholders bought a small development bank in Bulacan, with an initial vision to grow the small bank into a commercial bank based in Metro Manila.

Adopting a very personal and hands-on approach, the new owners saw first hand how the businesses of the bank’s clients were growing and were providing employment for more people. It was then that the new owners decided to stay committed to SMEs, no matter how big it would become.

The practice of development banking then was significantly underdeveloped, requiring a good amount of re-education among the bank’s management and employees, on the one hand, and the bank’s customers, on the other hand.

We maintained a long-term orientation and developmental perspective. We viewed our relationship with our clients as a long-term partnership and focused on elements that built value not just for shareholders but also for our customers. We gave strategic importance to capabilities that were most valuable to SMES such as introducing small entrepreneurs to business practices like bookkeeping and adhering to repayment schedules.

Our loan officers immersed themselves in the clients’ businesses, helping them draw their business plans and financial projections and walking them through the steps of the formal credit process. We did a lot of handholding, providing management counseling and other non-financial services and bringing clients together with prospective markets and suitable business partners.

Viability

Our start-up years were made easier by government subsidies and incentives. As a private development bank, we were able to avail of equity assistance from government, had access to special rediscounting windows, enjoyed a larger reserve differential on deposits, faced little competition and were entitled to tax exemptions.

But while we enjoyed the privileges that went with being a development bank, we were very much aware that our viability could not fully depend on government subsidiaries and support. We had to make profits to remain viable.

In choosing strategic alternatives or making investment decisions, we have never compromised profits and shareholder returns. While taking advantage of every opportunity to avail of low-cost funds, we also ensure that interest rates are adequate to cover our costs and overhead and to provide for comfortable margins. Our markets are prepared to accept higher rates in exchange for value added services that we provide on top of the loans. We consciously devote part of our portfolio to short-term loans which provide a faster turnover and require simpler evaluation proves.

Cost-effective lending

We have developed cost-effective approaches to lending. In evaluating credit risks, our loan offices have learned to use alternative approaches to financial assessment whenever the customer’s accounting records prove difficult to reconstruct or the information needed to evaluate the project is too costly to acquire. In the absence of financial statements, our officers make use of primary of secondary data such as sales invoices and bank statements to estimate revenues and make use of industry benchmarks to approximate profits and cash flow.

To minimize the cost of project supervision, we initially focused on those businesses which were encountering difficulties as well as the big ticket items, spending less time on smaller accounts with good repayment records. This allowed us to use the time more productively in the marketing of accounts and portfolio expansion. With the modernization of our systems, we have since expanded the scope of our project management and have begun a closer monitoring of our total portfolio.

We have used our branches not only as a means to get closer to our markets but also as a strategic tool for gaining intimate information about the communities we serve. Our people have developed good working relationships with bank clients. Familiarity with our borrowers have contributed to a more effective monitoring of our accounts.

We have consciously spread our portfolio over a broad base of borrowers, constantly maintaining a well-balanced portfolio in terms of geographic and sectoral distribution. We have countered the inherent weaknesses of SMEs by requiring guarantees and collaterals that served not only as a "second way out" in case of business failures but, more importantly, as a mechanism to instill discipline and a deeper commitment among our borrowers.

Track record

Our performance record proves that we were working on the right success formula. Over the years, our bank has grown at an average of 32% annually to become the country’s largest private development bank. From an asset base of P6 million in 1972, our resources have expanded to almost P20 billion towards the end of 2001, which is equivalent to the resources of a mid-sized commercial bank. Return on equity and assets have consistently been better than industry average. Our past due levels have remained among the lowest in the local banking system.

The international financial community has likewise taken cognizance of our track record and successes in SME lending. Forty-two percent of the bank’s capital stock is collectively held by the Dutch government (through the Netherlands Development Finance Co. or FMO), the Asian Development Bank, and the World Bank (through the International Finance Corp).

Last year, we inaugurated the Micro Enterprise Bank in Mindanao to provide competitively priced loans for the working and entrepreneurial poor and to usher them into the banking mainstream. This is also a strategic move to help strengthen the seedbed of future SMEs in the country.

In the pipeline is the introduction of new systems and processes that will allow us to provide quick turnaround loan products to address the short-term working capital needs of SMEs as well as the introduction of equity investments to complement our lending operations. Plantersbank also expects to play a significant role in providing wholesale financing facilities for smaller financial intermediaries, particularly in the more remote areas of the country.

Ours is a continuing process of transformation towards the attainment of our vision: to be world class, to be dominant in our market niche, and to be one of the best managed banks in the country.