Proportionate regulations to boost MSMEs

Proportionate regulations to boost MSMEs

By BENEL P. LAGUA


June 14, 2011, 1:14am
MANILA, Philippines — In an economy where MSMEs play a vital role in development, a comprehensive approach from government in terms of policy support is very much needed. Our policymakers have tried to respond to the needs of the sector and have put in place laws that are supportive to the MSME development advocacy. Upon closer review, however, the implementation of these laws has been found wanting.

For instance, while laws such as the Barangay Micro-Business Enterprise (BMBE) and the Magna Carta for MSMEs exist, have the supervisory approaches and the regulations been sufficient to increase support to the sector and to really aid its growth?

The Magna Carta for MSMEs or RA 9501 provides that banks allot at least 8% for micro and small and at least 2% for medium enterprises in their total loan portfolio. What makes a policy like this work is an appropriate penalty structure for non-compliance. If it is less expensive for banks to pay the penalties than lend the required amount to the sector, what do we expect? This incentive structure illustrates moral hazard.

It has been a major challenge for the Small Business Corporation (SBC) to push for the review of the current penalty structure to motivate banks, especially the bigger ones, to lend their money to the sector rather than just pay the penalties. Our wish is that this concern merits the consideration of our regulators.

In the meantime that some banks are non-compliant, penalties collected may be coursed through the implementation of programs that will capacitate small banks especially in the countryside to make them ready for MSME-lending activates. It can also finance the programs of the MSMED Council.

The BMBE, on the other hand, has been legislated to provide tax and minimum wage exemption benefits for very small barangay-based enterprises. But the implementing agencies – the local government units, the Department of Finance, and the Department of Labor and Employment - - have been reluctant on the law’s effective implementation for fear of alleged revenue losses.

One regulation worth reviewing is the requirement for borrowers to submit BIR-filed income tax returns (ITR) upon loan application inclusive of a waiver of confidentiality. Wisely, the Bangko Sentral ng Pilipinas (BSP) has issued a moratorium on this requirement, but one which will expire in December 2011. Should the moratorium be extended?

The reality is that ITRs do not fully reflect the enterprises’ true financial condition. It cannot serve as a true gauge of the credit worthiness of accounts, especially for small business enterprises. Of course, SBC maintains that business owners should fulfill their obligation to the government by paying the correct taxes.

However, lending institutions cannot be made to police MSMEs’ compliance to such obligation. As for the validation of financial statements, the examination of submitted documents by MSMEs in support of a policy thrust on enhanced risk management within the bank should be more than adequate.

The lowering of risk weight for banks’ SME and micro-finance portfolio represents another example of proportionate regulation that could have a positive impact on lending to the sector. One notes, however, that the liberalized risk weight is conditional on meeting certain prudential conditions. Unfortunately, said standards appear to be too stiff, i.e. PDR of not more than 5% and not less than 500 accounts in a diversified portfolio. The conditions can only be counter-productive.

Given the numbers that MSMEs represent, it is not surprising politicians and government leaders will say all the right things in support of the sector. However, all these platitudes and laudatory comments, and even the laws actually passed, will not provide the necessary stimulus objective or relief if the regulation supporting the policy pronouncement cannot meet the true test of execution.

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(Mr. Benel P. Lagua is the President / COO of the Small Business Corporation. He is likewise an active member of FINEX. Feedback and comments are welcome at benellagua@alumni.ksg.harvard.edu )

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