Banks adopt trends in risk management for MSMEs

CEBU, Philippines - Recognizing the micro, small and medium enterprises (MSMEs) sector as a vital engine growth and the biggest game changer in the Philippine economy, banks and other financial institutions have gradually adopted the trends in risk management and developments in the banking system for such industry.

This is according to Alegria Obien, a finance expert and consultant, during a forum on risk-based lending for SMEs organized by the Institute for Small-Scale Industries of the University of the Philippines.

As of 2009, the number of MSMEs operating in the Philippines has reached 777,357 which accounts for about 99.6 percent of the registered businesses in the country.

The sector also shares 63% of the labor force in the country, around 35.7% of total sales and value added in the manufacturing sector and 25% on the total export revenues of the Philippines.

She noted that such figures imply that the sector acts a seedbed for the development of entrepreneurial skills and innovation while contributing to the creation of wealth, employment and income generation in both urban and rural areas.

She added that competition could already be observed in the banking industry as developments have been adopted to cater to the needs of the MSMEs.

Aside from the expansion of stronger rural banks to thrift banks, she cited that commercial banks and other formal financial institutions are now into microfinance and small business market while urban banks have taken over rural banks and transformed into branches of urban banks.

However, she added that the common cause of concern for rural banks are low deposit-to-loan ratios, thus impacting the liquidity and resulting to closure of such banks due to loss of confidence in the banking system.

She then noted that banks and financial institutions currently practice risk management trends such as incorporation of a variety of metrics into their respective risk appetite statements, increased integration of risk appetite with business and financial planning, redevelopment of risk strategies and frameworks, strong visible shift towards strengthening the risk culture with more senior management involvement and reinvigorated risk procedures and more stringent analysis for both borrower and guarantors.

The SME profile, Obien added, is known to be a single proprietorship, family business, one-man show, traditional or hierarchical, has low capital base, informal organizational structure, undeveloped management skills and has tendencies to over expand.

With such distinction, the SME is referred to be a high-risk market for financial institutions due to unaudited or non-reliable financial statements, limited tangible assets to give as guarantee, limited outside credit checks, issue of succession and management depth, prone to family and spouse conflict issues and the reliability on the “smell test”.

She said that industry players should consider measurement, pricing and diversification as key considerations in credit risk portfolio management.

She also said that challenges in SME Lending include at board, strategic and senior management level, at the credit administration and operational level and mitigating risk with imperfect information.

She further cited that the key principles of sound credit risk management such as an appropriate credit risk environment, a sound credit granting process, appropriate credit administration, measurement and monitoring system and ensuring adequate controls should also be taken into consideration.    - THE FREEMAN