Mandatory lending needs to be scrapped

Banks are required by law to lend a certain percentage of their funds to agricultural ventures. A lack of borrowers from these ventures, however, forces banks to park their funds for regulatory compliance.

These funds cost banks extra, which Bangko Sentral ng Pilipinas deputy governor Diwa Guinigundo believes should not happen. Guinigundo feels that mandatory lending should be lifted to reduce costs for banks and at the same time free these funds for lending to other ventures that will sustain growth.

That much money, P570 billion, when freed, would be a bonanza for small- and medium-scale entrepreneurs, engines of economic growth and the largest employers.

Guinigundo said the funds, instead of being idle, can be lent to other financing companies that would relend to small enterprises.

SMEs account for 99.6 percent of the country’s total enterprises, employ 61 percent of the country’s total employed population, and contributes 32 percent to GDP.

A recent survey on Financial Access by the World Bank estimated that only around 20 percent of Philippine SMEs are serviced by banks. In comparison, 60 percent of SMEs in countries like Malaysia have access to banks.

At present, banks are required to set aside a portion of their total loan portfolio available for small- and medium-scale enterprises. That’s at least 6 percent for small enterprises and at least 2 percent for medium enterprises.

Then there’s the required 25 percent that must be set aside for agri-agra loans.

“If mandatory lending requirements are removed, (the money freed) can support loan growth for economic activity. Because of (mandatory lending) some banks are forced to do alternative compliance, like investing in treasury bills that (at present) have lower yields,” Guinigundo said.

Bank lending has grown at double-digit rates since January of last year, and Guinigundo feels that there is more room for growth.

“The money is there for lending but some are just parked for regulatory compliance. And these parked funds are extra costs for banks,” he said.

“Instead of being able to lend these (money) out, they are required to set these aside. What if no one avails? The money is just there, idle,” Guinigundo said.

What banks do is to put their funds in special deposit accounts that reached P1.6 trillion recently.

Banks hesitate to lend under the Agri-Agra Law since borrowers are not really creditworthy.

Guinigundo said that it is not prudent for banks to lend to some agri borrowers because some are not creditworthy and banks have a fiduciary role to safeguard public’s money.

“You can’t expect a bank to extend a loan from a one-page request. Borrowers should have a detailed feasibility study of where the money that they are borrowing will go,” Guinigundo said.

“There is scope to review mandatory lending. But since it is a law, it really has to be done by congress,” Guinigundo said.

The latest data from the BSP showed that 672 banks allocated P569.5 billion or 22.8 percent of total loanable funds to agri-agra loans, reflecting a shortfall of 2.2 percentage points required by the law.

Banks that fail to set aside 25 percent of loanable funds to the sector could still pick on an alternative compliance, including lending to education, healthcare, housing, and other social services sectors. –JIMMY CALAPATI, Malaya