Microfinancing - Some Thoughts to Ponder

by Elvira D. Lorico

This is a rejoinder on the views entitled “Microfinance Seminar – An Appreciation” shared in the ARBEX Express January 2002 issue by our colleague Mr. Carlos L. Landagan. According to him the two-day seminar-workshop held last January 2002 provided the examiners with the initial knowledge on the operations of microfinance banks. Such seminar gave the participants a bird’s eye view of what microfinance is all about. For over six months now, examiners from the Department of Rural Banks (DRB) have been hearing a lot about the newest “project” of BSP and this is – microfinancing. Many rural bankers have been thinking aloud on what could be their benefits from engaging in this new financing scheme. DRB examiners have been besieged by a lot of nagging questions not only from among themselves but most of all from the rural bankers. Of course these examiners, being members of the Supervision and Examination Sector (SES) of BSP, ought to know the intricacies of supervising microfinance-oriented banks. Now the question is – are they ready for this? Some well-meaning individuals, who are possibly hinting at something, have been saying that DRB examiners are making it difficult for rural banks engaged or about to engage in microfinancing. “Pinahihirapan” is their word for examiners who throw a lot of questions to the bank. Before an accusation like this worsens to the detriment of the examiners, let us look closely on some issues at hand.

MICROFINANCING BANDWAGON – TO JOIN OR NOT TO JOIN?

1. Microfinance people said that the current microfinancing scheme is helping the poor help themselves. Wary bankers are asking --- is this not similar to the Masagana 99 and the Maisan projects at the time of then President Ferdinand E. Marcos? They likened this new financing scheme to M99/Maisan wherein the farmer-borrowers thought that the loan proceeds were dole outs from the government. When these micro credits turned sour, those poor banks that jumped into the bandwagon were left with an empty bag prompting BSP to close them. The sad experience is like a nightmare that keeps on coming back in the minds of our countryside bankers. In fact, until now examiners still see the remnants of these credits which turned sour in the loan listings of some banks. These loans were either written-off or classified as “Loss” and given a hundred percent valuation eating up the bank’s undivided profits.

2. Microfinance people said that the current financing scheme is different from the M99/Maisan project because borrowers are now required to attend group meetings or divided into cells where they will be taught the value of money and the effective ways of maximizing its usefulness. Wary bankers are now asking --- how on earth are they going to maintain or supervise these meetings without straining their resources – both manpower and financial? There are still rural banks that employ only five individuals including the officers who are already burdened, as they are, with the daily banking transactions.

3. Microfinance people said that zero past due is possible because each credit collector will handle a certain number of borrowers/groups/cells whom they will visit daily or weekly. Wary bankers, on the other hand, are asking --- how on earth are they going to hire more employees when they are already finding it difficult to sustain the salaries of their present employees?

These are only some of the questions that rural bank examiners encounter during field examinations. Such questions mirror the apprehensions of some of our rural bankers who once witnessed the sad plight of their co-bankers or who are still saddled with the burden of carrying non-performing loans as a result of joining the M99/Maisan bandwagon.

MICROFINANCING SUPERVISION versus RISK-BASED EXAMINATION APPROACH

Having encountered some of our bankers’ apprehensions on microfinancing, let us now focus on some of the issues involved in banking supervision which boil down to bank examination. A few years back, a transactional approach was used in analyzing the bank’s financial condition based on its past transactions. Now, with the introduction of e-business, banking services and transactions have become more complex prompting financial regulatory and supervisory bodies such as BSP to adapt to the situation and adopt risk-based examination approach to banking. Analogous to driving a car, the examination approach now is more of looking at the windshield and not at the rearview mirror. Examination is now pro-active, not re-active. Any mistakes committed in the past would only merit remedial or corrective measures but the damage had been done - the bank had already incurred losses from its operations. Looking forward, as in the case of risk-based approach, banks are made aware of their risk exposures that may result in future losses if preventive measures are not in place. Considering this new approach to examination, what are now some of the issues confronting the examiners?

1. One of the characteristics of microfinancing is that loans are typically unsecured and do not require the submission of documents such as the borrower’s income tax returns or financial statements. In micro lending, the borrower’s capacity to pay is based on his cash flow. Examiners, on the other hand, gauge borrower’s capacity to pay based on the documents submitted to the bank. Moreover, applying BSP’s prudential practice of a 30% ceiling on unsecured loans, examiners readily see the credit risk exposures of the bank.

2. Some banks dealing in microfinance are requesting for a different accounting approach to record the release of loan proceeds and recognize income. They contend that due to the large volumes of micro credits, an innovative accounting and record-keeping system such as the one used by the Association for Social Advancement (ASA) of Bangladesh is practical and suited to microfinance transactions. The ASA accounting system of recording loans at principal plus interest is different from what BSP is implementing following the accounting principle of conservatism – that of recognizing loans at their principal amounts only. Now, examiners would like to know – in the absence of any guidelines or circulars, which accounting system to follow? For banks with both traditional and microfinance loans, are we going to use both traditional accounting method and the ASA accounting system? Aren’t we creating a “mestizo” financial statement?

MICROFINANCING – MADE DIFFICULT BY DRB EXAMINERS???

Microfinance has a noble purpose that aims to provide financial services to our poor countrymen through high standards of credit and discipline and continuous education on responsible borrowing. Microfinance-oriented banks will play a very special role in the attainment of this noble purpose. BSP, through the SES, will play an even greater role in “helping banks help the poor help themselves”. Amidst all these, the examiners have a crucial role in promoting micro credits and at the same time in performing BSP’s supervisory function. In so doing, examiners need to have concrete guidelines on how to supervise and examine microfinance-oriented banks. A “mestizo” approach to examination is not enough assurance to prevent the mistakes of the past from happening again. It’s not enough that we encourage these banks to go micro lending. It is important that the SES, with its supervisory function, lay out concrete supervisory guidelines for examiners to implement.

It is unfair then, to conclude that examiners are making it difficult for the banks to engage in microfinancing. Instant conclusions are not fair when all the facts or issues are not made clear. These people are only doing their jobs in trying to implement BSP rules and regulations concerning bank supervision. Unless immediate guidelines on supervising microfinance-oriented banks are issued, these people will be in a quandary on how to treat this innovative lending scheme.