SMALL entrepreneurs who are thinking of growing their businesses but lack the finances do so can now apply for a bank loan without having to worry about collateral. This, as the Small Business (SB) Corp.introduced last Wednesday risk-based lending (RBL) in the Visayas. RBL calls for the modernization of methods used by financial institutions (FI), including banks, to evaluate small business loan applications.

SB Corp. chairman and chief executive officer Virgilio Angelo said it aims to increase access of micro, small and medium enterprises (MSMEs) to financing through the implementation of RBL, a credit assessment model that focuses on the enterprise rather than the entrepreneur’s capacity to put up collateral. Physical collaterals like real estate, according to the Bangko Sentral ng Pilippinas (BSP), is the current main determinant of borrower eligibility and “one of the largest barriers to financial access” by small businesses.

The BSP noted that MSMES compose about 99.6 percent of the total number of enterprises in the country, account for almost 70 percent of total jobs, and contribute 30 to 32 percent of the gross domestic product.“Through RBL, we hope to establish confidence in the relationship between the borrower and lender to boost the small business community,” Angelo told Sun.Star Cebu during the RBL Visayas launching at Cebu Parklane International Hotel.

RBL implements a borrower risk rating (BRR) system that allows an MSME, regardless of type of business registration and asset size, to avail itself of a loan without collateral. The loan application is evaluated based on the lender’s rating of the borrower that makes use of credit scoring models. The borrower’s risk aversion is measured according to cash flow, administration, market and production. Under RBL, alternatives for collaterals are available through cash flow lending, purchase order financing and receivable financing. SB Corp. president Benel Lagua stressed that RBL is only possible through an “integrated” process that includes loss provisioning, interest rate pricing, borrower monitoring, organizational structure and credit application review.

Financial literacy: SB Corp. is also promoting financial literacy and transparency among small businesses to complement the financial institutions’ adoption of a fair and more progressive credit assessment model. BSP Deputy Governor Nestor Espenilla cited a recent study by the International Finance Corp. that shows that the funding obtained by the MSMEs in the country from formal financial institutions or banks account for only between 12 to 21 percent of their total current funding. This figure is lower compared to Thailand’s 34 percent.

“MSMEs still rely on internally generated funds, loans from family or friends, and other informal lenders. These types of sources are not usually sustainable and are not readily available,” Espenilla said in a speech delivered by BSP Deputy Director Rogelio Encinas. With RBL, Angelo said that there will likely be an increase in the number of MSME borrowers even in rural banks in the next few months.

SB Corp., which already established a BRR system in its credit processes, is confident about meeting its target and to release a total of P4 billion in loans nationwide this year. SB Corp. formally launched the RBL movement last July in Manila, following the May ratification of Republic Act 9501 or the revised Magna Carta for MSMEs, which provides for increased lending and stricter compliance to the mandatory allocation of credit. In the next three to five years, SB Corp. is looking at capacitating at least 100 rural banks on RBL and at least 500 MSMES in setting up of ICT-based accounting systems, as well as putting up of an MSME finance institute.

Source: www.sunstar.com.ph