ACCESS to credit is vital in driving expansion and growth, asset building, and maintenance. Micro, small and medium enterprises (MSMEs) that are provided credit can potentially increase their production and expand market outreach.
The rural banks are mandated by law to extend loans to MSME clients. As of the third quarter of 2015, the rural banking industry had extended P20 billion to the micro and small enterprises and P9.6 billion to medium-sized enterprises. These figure translate to 22 percent and 10 percent compliance to MSME lending versus the mandated 8.0 percent and 2.0 percent, respectively.
To contract a loan, borrowers must first pledge a piece of collateral or a specific property to secure the repayment of the loan. However, not all borrowers, especially MSMEs, own properties that can serve as collateral for loans.
According to the Asian Development Bank (ADB) report, Integrating SMEs into Global Value Chains: Challenges and Policy Actions in Asia, which was released in the last quarter of 2015, one of the major constraints to accessing credit is collateral and guarantee requirements for loans.
This is where the importance of a centralized credit database comes in.
Recognizing the importance of credit data, the Credit Information Corporation (CIC) is mandated to develop and maintain a comprehensive and centralized credit information system or registry in the country. The registry will have borrower’s credit record, which will include positive information such as timely payments, and negative information in case of late or non-payment of loans.
The presentation of positive as well as the negative data will allow lenders to look beyond the capability of borrowers to repay through collaterals and instead, may consider loan approval based on the behavior of borrowers.
Knowledge of applicants’ credit histories will enable banks to choose appropriate terms for loans, increase their lending appetite to smaller firms and individuals, and make good credit judgments to reduce risks.
To date, the rural banking industry is in the process of registering and submitting clients’ credit data to the CIC while participating in ongoing road shows that aim to educate the industry about the value and technicalities of credit data submission.
With the changing approach in providing credit, through the development of tools and database, the processing of loan applications will be eased. The rural banking industry is optimistic that this development will further help MSMEs gain access to credit which, in turn, may translate to a more vibrant economy.