Ensuring availability of suitable financial products and services

THE BANGKO Sentral has embarked on regulatory reform initiatives to promote the twin objectives of enabling banks to diversify their loan portfolio hence, better manage their risk exposures, and to empower the unserved and underserved markets by unlocking opportunities to access financing from the banking industry.

The BSP has learned from lessons of past risk management systems that have disproportionately managed risk which led to the unintended consequences of discriminating certain sectors or individuals. On the one hand, banks tended to shy away from borrowers like micro, small and medium enterprises who could not provide formal financial documents or to start-up companies with financial ratios below the thresholds. On the other hand, regulations also did not provide flexibility or proportionality by imposing the same set of requirements across all types of borrowers. This did not only limit business opportunities for banks but also excluded important segments of the society from the banking system.

The deliberate shift in the regulatory framework presented fresh and progressive perspectives in complying with mandated lending requirements and in meeting supervisory expectations in managing risk.

A case in point is the introduction of agri-value chain financing, which espouses a holistic approach in contributing to the growth of the agricultural sector. It recognizes the contributions of each actor in the ecosystem to transform an agricultural product to higher value outputs. Lending to each of these actors in the ecosystem is considered acceptable compliance with the mandated agri-agra requirements. The Bangko Sentral also issued guidelines that embrace the ap- plication of the principle of proportionality in lending operations. That is, expectations from banks are commensurate with the size, risk profile, and systemic importance of said financial institutions. Following this principle, banks are expected to adopt policies that are suited to the industry of the borrowers and sensitive to the risks they pose. Banks are allowed to adopt innovative methods and requirements to adequately assess and support the capacity of borrowers to pay. Banks are also expected to understand the timing and nuances of cash of flows of these borrowers and determine indicators of default beyond merely cash flow timing concerns. In this light, banks are allowed to adopt payment grace periods suited to the assessed profile of the borrowers.

The legroom provided by the regulatory framework in lending to various markets including the unserved and underserved sector is consistent with the key tenets of effectively managing risks. It promotes diversification of portfolio, better understanding of risk exposures, and more proactive management of potential defaults. This results in broadening the opportunities to avail of loans from banks beyond those normally given to established businesses and longtime clients. It also enables the bank to be more responsive to the needs and capacities of the customer.

This flexibility and proportionality as well as openness to innovation is not only expanding access to credit, but to a wide range of much needed financial services and the way they are designed and delivered. This provides regulatory certainty for providers while not stifling innovations that can ultimately benefit consumers. The Bangko Sentral ng Pilipinas (BSP) led by Governor Nestor Espenilla, Jr. (center left), Department of Trade and Industry (DTI) led by Secretary Ramon Lopez (center right), Microfinance Council of the Philippines, Inc. (MCPI) led by Kamrul Tarafder (representing Chairman Jose Victor Lobrigo, left), and Alliance of Philippine Partners for Enterprise Development, Inc. (APPEND) led by Edgardo Garcia (right) recently entered into a Memorandum of Agreement (MOA) to expand the financing ecosystem of Negosyo Centers. Through this multipartite partnership, financial services will become more accessible to the micro, small and medium enterprises (MSMEs) served by Negosyo Centers across the country. Also in photo are (from left to right): BSP Deputy Governor Chuchi Fonacier, DTI Undersecretary Zenaida Cuison Maglaya, MCPI Executive Director Allan Robert Sicat, and APPEND President and CEO Virginia Juan.