This is the story of a major user of credit guarantees in the Philippines. Bank Positive is a universal bank which was looking for an entry point into the SME middle market. Because it was traditionally conservative, it needed some support systems to cushion its foray into unfamiliar territory. Fortunately, there was the Guarantee Fund for Small and Medium Enterprises or GFSME that was willing to provide credit risk cover of up to 85% of the bank’s loan exposure.
Bank Positive and GFSME were strong partners for several years. In due time, the bank had enrolled loans of over P1.1 Billion during their partnership.
And the bank’s risks were indeed covered. During those years, the bank was eventually paid P121.0 Million in guarantee calls for soured accounts. GFSME recovered P60.0 Million of those calls, and although it is still exposed by another P60.0 Million, 80% is expected to be eventually settled, albeit with some delays. The bottom line however is that SME loan originations were facilitated leading to the economic multiplier effect. And GFSME’s loan loss will still be within acceptable levels.
The lesson is clear. Banks should learn how to use credit guarantees to guide their entry into the SME market. And there are credit guarantee institutions that are credible and with strong financial base who can squarely meet the demands of the local banking industry.
A study by Juan Luis Llorens of the loan guarantee systems for SMEs in Europe mirror the local situation. Banks there have expressed that "their relations with SMEs involved greater risks, that their dossiers cost more to administer". Hence, the European Commission has recognized that "the provision of national and local government guarantees for loans, or the underwriting of part of the obligations of organizations having the same function, has clearly proved its value."
Llorens has enumerated the benefit of the guarantee for the banks. "The benefit of introducing a third party into its credit operations comes from the reduction of risks that in turn leads to a higher volume of loans and a higher number of customers. This reduction comes from a better analysis of credit demands through the participation of the guarantee society; and an effective reduction of the costs of defaults through the substitution of the defaulting borrower by the guarantor. It should be stressed that normally this guarantee is much more liquid (therefore, less costly) than any alternative guarantee that the bank requires from the borrower. The guarantee will be more appealing to the banks the higher the percentage of risk covered. Attractiveness also increase if payment of defaulted loans is immediate."
We cite this study to demonstrate that indeed there are very real benefits to the guarantee that banks should pay close attention to. SMEs can better be serviced if banks collaborate closer with the guarantee institutions.
Although GFSME no longer exists, it has actually been merged and absorbed into the Small Business Guarantee and Finance Corporation or the SB Corporation. SB Corp’s asset base is more than double the size of the former GFSME and has a more solid financial fundamentals. It can thus service easily the guarantee demands of its accredited banks. And since SB Corp is building on the strength of the former GFSME, it too has a strong commitment to pay defaulted loans within a short time of its call, a feature that should be attractive to banks.
There is another reason why banks should take a second look at the enrolling SME loans for guarantee. No less than the BSP governor Rafael Buenaventura has been quoted as saying that banks should get a guarantee from SB Corporation so that loans would be classified as regular and not specially mentioned. That way, the banks would only shoulder the minimal guarantee fee which is a lot lower than the required loan-loss provisioning cost for specially mentioned accounts.
