Building SME lending competencies
Credit to Author: BENEL D. LAGUA| Date: Thu, 07 Feb 2019 17:02:43 +0000
As of June 2018, the Bangko Sentral ng Pilipinas (BSP) reports that 155 banks – out of 581 head offices – have tapped 1,751 branch-lite units to expand physical outreach in 738 local government units (LGUs), of which 151 LGUs were being served by branch-lites alone. Branch-lites have limited banking activities but could provide a wide range of products and services suited for servicing the needs of the market, except for sophisticated clients with aggressive risk tolerance. These branch-lites were formerly referred to as extension offices, microbanking offices and other banking offices.
The report said about 66.3 percent of all municipalities now have banking presence, with 93.2 percent of municipalities having at least one financial service access point. Still, only 47.9 percent of Filipino adults have savings, but 71.3 percent still keep their savings in informal channels.
The BSP is optimistic this number will grow with the increase in branch-lites as they aim to use “the National Strategy for Financial Inclusion (NSFI) to fully develop the financing ecosystem for agriculture and micro, small, and medium-sized enterprises (MSME) financing.”
This development is indeed encouraging because the establishment of branch-lites gives banks the flexibility to consider the appropriate infrastructure necessary to serve the needs of the area where they are present. This is a positive move to expand the delivery infrastructure for the inclusion goal.
When it comes to MSME financing however, building the access network must be viewed as a first step. There is a need to re-tool and change the lenders’ approach to MSME lending. In this author’s view, many of those who claim to be doing MSME lending are still using either corporate banking lending models or consumer lending methodologies to a sector that deserves a different tool kit and mindset. There is a dire need to provide focused, tailor made and practical training on SME lending in recognition of their unique circumstance.
Part of the problem is the reward mechanism for loan generation. Many lenders will take the easy way out, getting the larger accounts which provide higher margins and expected profitability. Just look at the recent Hanjin loan fiasco and how big the exposure was for the major commercial banks. In most likelihood, the lending officers of these banks were hugely rewarded when these accounts were originated and while they were current in status. Just imagine how many SME loans are needed to generate one Hanjin-like account.
Many studies have shown how an increased share of lending to SMEs aids financial stability, mainly by reducing the number of non-performing loans (NPLs) and lowering the probability of default by financial institutions. This calls for a greater diversification of bank asset through new SME loans that reduce the overall riskiness of a bank’s portfolio.
Evidence of course tells us that in the Philippines, banks, especially the big ones, have generally been unable to meet the 10 percent mandatory lending to SMEs. More work is thus needed.
We need to build competencies in the frontline for prospective SME account officers. Training programs must aim to provide: 1) an understanding of what it takes to make SME financing successful; 2) an understanding of the business drivers of the SME business line; 3) an understanding of how SME credit and loans are different from other types of credit; and 4) a practical understanding of the core principles of SME finance including the ability to quickly analyze information about the borrower, the business, the financials and loan request.
While such training will primarily target the frontliners, the middle office must be involved so that credit risk evaluation will appreciate the unique characteristics of the SME loans. SME lending needs support from the top and understanding of the risk managers so that there is consistency and alignment at all levels in the organization
And after we have trained our SME frontliners, let’s find ways to reward them appropriately, in metrics that differ from how the middle market and corporate banking frontliners are compensated. It is well proven that the incentive structure will be an important determinant of how the financial institution will deliver on the desired portfolio mix.
(Mr. Benel D. Lagua is Executive Vice President at the Development Bank of the Philippines. He is an active Finex member and a prime advocate of risk based lending for SMEs. Feedback and comments are welcome at benel_dba@yahoo.com)
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