Credit access in the pandemic

THE Bayanihan to Recover as One Act set aside an allocation of P55 billion to provide low interest loans to sectors severely affected by the coronavirus pandemic. Of this amount, P18.4725 billion is for the Land Bank of the Philippines, P10 billion for Small Business Corp. (P4 billion for MSMEs, cooperatives, hospitals and overseas Filipino workers and P6 billion for tourism); P6 billion for the Development Bank of the Philippines; and P5 billion for the Philippine Guarantee Corp. The remaining P15.5275 billion is a standby fund to be infused into LANDBANK and DBP as additional capital. While this appears to be good news, please note that only around P40 billion is intended for the lending program. As I have written in another column, is this amount sufficient given the very bad state of the economy with most small businesses at standstill? Likewise, is the delivery and distribution system solely through the government financial institutions (GFIs) operationally effi cient.

SME lending is primarily a distribution problem. Constraints like transaction costs, fixed costs in intermediation, economies of scale, distance and regulatory hurdles are aplenty. A large part of funds flow is handled by intermediaries, which is dominated by private financial institutions. It is important to use existing distribution channels that are close to the customers in order to efficiently reach out.

When the US Congress passed its Coronavirus Aid, Relief and Security Act (CARES), it opened several windows for small business and eligible non-profit organizations, veterans’ organizations, tribal businesses and individuals who are self-employed and independent contractors. It had an allocation of $670 billion for the Paycheck Protection Program. But what stands out is that the Small Business Administration (SBA), mandated to implement the program, will delegate authority to SBA-certified lenders to process application. In addition, federally insured depository institutions and credit unions as well as farm credit system institutions will be available to apply as approved lenders for the program.

In other words, the SBA expands its reach by accrediting the private sector financial institutions who have excess liquidity available for loans. Funds that have been allocated by Congress will multiply because of the leverage effects and should reach beleaguered businesses in a timely manner.

The SBA-certified lenders will be given delegated authority to speedily process loans. The SBA guarantees 100% of the outstanding balance, and that guarantee is backed by the full faith and credit of the United States.

In addition, the SBA waives all guaranty fees, including the upfront and annual servicing fees. Lenders do not collect fees from applicants. SBA will pay lenders fees for processing loans in graduated levels: five percent for loans not more than $350,000 and less than $2,000,000; and one percent for loans of at least $2,000,000. This is an interest subsidy and it is higher for smaller chunks.