BSP encourages more lending to help MSMEs
As incentive to increase lending to small businesses, the Bangko Sentral ng Pilipinas (BSP) will consider loans to micro-, small-, and medium-scale enterprises (MSMEs) as part of compliance to reserve requirements (RR).
The Monetary Board, BSP’s policy-making body, has yet to release the guidelines for the new rule as well other related measures. Banks are required to maintain liquidity reserves with the BSP as government securities, deposits and cash.
BSP Governor Benjamin E. Diokno said that since the virus pandemic has “severely disrupted” economic activity, the Monetary Board decided to issue additional set of measures to “further reduce the financial burden on loans to MSMEs (which will) be counted as part of banks’ compliance with reserve requirements.”
Diokno said the COVID-19 outbreak could worsen in the global scale which will hamper economic growth for the rest of 2020. “The Monetary Board also assessed that it would take time before the situation stabilizes,” he said.
Considering the continued rise of COVID-19 cases, particularly in the Philippines, Diokno said the Monetary Board decided to cut the BSP rate by another 50 basis points (bps) this week, weeks ahead of its scheduled monetary policy meeting on May 21.
“(The) Monetary Board believes that a further reduction in the policy interest rate as well as increased support for lending to MSMEs would ensure adequate liquidity in the financial system and help reduce borrowing costs,” said the BSP chief.
“These measures should thus mitigate the adverse impact of the outbreak on the economy by reinforcing the health and fiscal measures already being rolled out by the National Government.
The monetary initiatives will also quicken economic recovery as the pandemic fades,” added Diokno.
He also reiterated that the BSP will back up the government’s “urgent and carefully coordinated measures” and that they are “prepared to use its full range of monetary instruments and to deploy regulatory relief measures as needed in line with its price and financial stability mandates.”
ING Bank economist Nicholas Mapa said the BSP move would release about P360 billion as fresh lending to small firms. “Any further loans to this sector could eat into the P1.2 trillion set aside in the BSP’s virtual vaults,” he said.
“Details on the new directive are forthcoming but Diokno is getting quite creative in churning out new ways to help provide stimulus. Although a different model used by other countries such as the US and Indonesia that have specific funds setup primarily for SMEs, but it follows the current trend of BSP flexing while investors look to the fiscal side of the fence to match,” noted Mapa.
Mapa said the latest BSP decision is a de facto RR reduction. “(It) frees up more money for banks to lend out to the greater public who will be needing cash to fight off the fallout from COVID19. But as what we’ve seen from past RR reductions, credit conditions and the general state of the economy matter in the timing of such moves and throwing money at the problem is not as effective unless channeled effectively.”
The BSP has so far cut RR ratio by 200 bps as of March 30, releasing P225 billion liquidity. Another 200 bps reduction is pending, depending on market conditions.
As of end-2019, banks’ lending to MSMEs amounted to P228.36 billion when it should have reached P651.89 billion to comply with the Magna Carta law for MSMEs which is to lend eight percent of banks’ total portfolio to this sector.