Microfinance in the Banking Sector

Presentation for APRACA CENTRAB Participants15 December 2011

Presentation Outline

• Mandate and Role of the BSP• BSP Issuances on Microfinance– Definition– Licensing and Branching– Incentives– Safe and Sound Operations– Expanded activities– Issuances Implementing Various Laws

• Microfinance Exposure of Banks

BSP Mandate

• The General Banking Law of 2000 (Republic Act No. 8791, Sections 40, 43 and 44) mandates BSP to recognize the peculiar characteristics of microfinance in the requirements, terms and amortization of loans and other credit accommodations

• BSP approach is to develop a microfinance “friendly” policy and regulatory environment to:– Allow banks to have a wider scope for safe, sound and

sustainable microfinance operations– Protect the depositors, microfinance clients and the

financial system

Role of the BSP• BSP is the regulatory and supervisory authority over all banking

institutions, including those with microfinance operations• BSP issues rules and regulations for safe and prudent banking

operations• The main basis for prudential regulation is to ensure the safety

of public deposit taking activities• BSP conducts annual and special examination of its supervised

institutions• BSP checks compliance with banking laws, rules and regulation,

and uses the CAMELS instrument for bank supervision

Capital Adequacy Asset Quality Management

Efficiency Liquidity Sensitivity to Market Risks

Microfinance Issuances

• BSP issues circulars, circular letters and memos which set rules/regulations/ guidelines that govern microfinance operations of banks

• Issuances focus on the following:– Microfinance Definition– Licensing and Branching– Incentives for Microfinance– Rules for Safe and Sound Operations– Expanded Activities– Rules Implementing Various Laws

Microfinance Definition

• Circular 272 (30 Jan 2001) – Implements provisions of the General Banking Law– Recognizes cash-flow based lending as a peculiar feature of

microfinance– Defines microfinance loans and – Provides for the exemption of microfinance loans from

rules and regulations issued with regard to unsecured loans

Microfinance Definition

• Circular 694, Annex A (14 Oct 2010)– Expands the definition of microfinance to include micro-

deposits, micro-enterprise loans, micro-agriculture loans, housing microfinance loans and micro-insurance

• Circular 678: Housing Microfinance Loans (6 Jan 2010) • Circular 680: Micro-Agri Loans (3 Feb 2010)• Circular 683: Microinsurance (23 Feb 2010)

Microdeposits

• Microfinance savings deposit accounts that cater to the needs of the basic sectors, low-income and unserved/ underserved clients

• Microdeposits are designed and priced to fit the needs and capacity of the target market: – Minimum maintaining balance not exceeding PhP 100– Not subject to dormancy charges– Only for individual microfinance clients whose average

daily savings account balance does not exceed P15,000

Microenterprise Loans

• Small and short term loans granted to the basic sectors, on the basis of the borrower’s cash flow, for their microenterprises and small businesses.

• The principal amount of a microenterprise loan can be generally pegged at PhP150,000

Housing Microfinance Loans

• Loans granted for home improvements, house construction, house and/or lot acquisition using microfinance principles in accordance with BSP regulations

• Maximum principal amount generally pegged at PhP300,000• Payment terms up to 15 years • Acceptable valuation in cases of usufruct, leases, etc.• Loan value up to 90% appraised of real estate mortgage

(REM) or acceptable valuation in cases of usufruct, lease, freehold, right to occupy/build

Microinsurance

• Thrift, rural and cooperative banks can now market, sell and service approved microinsurance products of licensed insurance companies to their microfinance clients

• Microinsurance is a financial product or service that meets the risk protection needs of the poor where:– The amount of premiums, contributions, fees or charges,

computed on a daily basis, does not exceed five (5) percent of the current daily minimum wage rate for non-agricultural workers in Metro Manila; and

– The maximum sum of guaranteed benefits is not more than 500 times the daily minimum wage rate for non-agricultural workers in Metro Manila.

• Insurance Commission approves products and licenses companies

Licensing and Branching

• Circular 273 (27 Feb 2001)– Partial lifting of moratorium to allow opening of new

microfinance-oriented thrift and rural banks and branches– Provides opportunity for MF NGOs to formalize as banks so

they can mobilize savings from the general public• Requirements for licensing:– Majority of the board with microfinance experience and at

least one with actual banking experience– At least 50% of gross loan portfolio shall consist of

microfinance loans – Efficient loan tracking system

Licensing and Branching

• Circular 340 (30 Jul 2002) – Provides rules on establishment of loan collection and

disbursement points (LCDPs)

• Circular 365 (16 Jan 2003)– amends C340 relative to MF-oriented Banks

• Circular 369 (17 Feb 2003)– Amends C340 relative to minimum capitalization

requirements for thrift/ cooperative banks in the NCR

Licensing and Branching

• Circular 505 (22 Dec 2005)– Allows qualified microfinance-oriented banks and

microfinance-oriented branches of regular banks to establish branches anywhere in the Philippines

• Circular 624 (13 Oct 2008)– Amends branching policy and provides guidelines on the

establishment of extension offices and other banking offices (OBOs)

Licensing and Branching

• Circular 669 (22 Oct 2009) – Allows OBOs/LCDPs of microfinance-oriented banks/

branches to service limited withdrawals of microfinance clients

• Circular 694 (14 Oct 2010)– Amends portions of C624 and C669, classifies OBOs into

regular OBO and microfinance OBO (MF-OBO) or microbanking office (MBO)

– Expands the range of activities that MBOs can provide to microfinance clients

Circular 694: OBOs• OBOs: any permanent place of business other than head

office/branch/extension office, engaged in any/all of the following non-transactional activities: – Market bank products and services– Accept loan applications, conduct preliminary credit

evaluation, perform credit administration support– Host on-site ATMs– Perform customer care services – Perform customer identification, receive account opening

documents, facilitate account activation (account opening approval and actual opening of deposit accounts done only head office/branches/extension office)

– Other BSP authorized non-transactional banking-related activities

Circular 694: MBOs• MBOs: primarily cater to banking needs of microfinance

clients and overseas Filipinos (OFs) and their beneficiaries. Aside from non-transactional activities, they may also engage in any/all of the following transactional activities:– Accept micro-deposits including initial deposit, and service

withdrawals – Accept check deposits for credit to MF clients’ deposit

accounts– Disburse/release proceeds of microloans and collect loan

amortization payments– Present, market, sell and service microinsurance products– Receive/pay-out funds for authorized remittance

transactions

Circular 694: MBOs

• Continuation of allowable MBO activities:– Act as a cash/money in and cash/money out for e-money– Collect premiums/pay out benefits of social security

institutions (GSIS, SSS, PhilHealth, Employees’ Compensation Commission, other government authorized pension and benefit systems)

– Pay-out benefits under government-sponsored conditional cash transfer (CCT) scheme

– Accept utilities payments– Purchase foreign currencies up to the maximum equivalent

of USD300 per client per day for credit to micro-deposit accounts

MF Incentive: Rediscounting

• Circular 282 (19 Apr 2001)– Opens a rediscounting facility for rural/cooperative banks

to refinance their microfinance loan portfolios• Circular 324 (2 Mar 2002)– Opens a rediscounting facility for thrift banks engaged in

microfinance • Circular 515 (3 Mar 2006) amends C282 and 324:– One year track record– At least 500 active microfinance borrowers– Portfolio-At-Risk of not more than 5%– Repayment rate of 95%

MF Incentive: Reduced Risk Weight

• Circular 364 (19 Jan 2003) reduces risk weight applicable to small and medium enterprises (SMEs) and microfinance loan portfolios that meet prudential standards to 75%– Highly diversified portfolio– Portfolio-At-Risk at 5% for last three years– Adequate risk management processes– CAMELS of “3”; Management score of “3”

MF Incentive: Relaxed Documentary Requirement for Client

• Circular 549 (9 Oct 2006)– Exempts microfinance clients from the required submission

of additional documents for the granting of loans

• Circular 608 (20 May 2008)– Revises rules on acceptable identification cards, lessened

the ID requirement to 1 valid card (previously required 2) and widened the range of acceptable IDs

Issuances to Ensure Safe, Sound, Sustainable Operations

• Circular 409 (14 Oct 2003)– Sets rules, regulations and standards for microfinance

operations of banks, specifically the measurement of Portfolio at Risk and Loan Loss Provisioning

• Portfolio-At-Risk (PAR):– Outstanding principal amount of all loans that have at least

one installment of principal past due for one day– Includes entire unpaid balance, including both past due

and future installments but not accrued interest– Includes restructured or rescheduled loans

Circular 409: Loan Loss Provisioning for Microfinance

Loan Loss Provision

Current 1 %

PAR 1-30 days 2 %

PAR 31-60 days/ R1 20 %

PAR 61-90 days 50 %

PAR over 90 days/ R2 100 %

Note: Microfinance loans past due for over 91 days and are fully provisioned may be written off

Issuances to Ensure Safe, Sound, Sustainable Operations

• Circular 607 (30 Apr 2008)– Identifies the reportorial requirements for all banks

engaged in retail microfinance– Sets guidelines on how the report should be accomplished

• Circular 725 (16 Jun 2011)– Provides the framework for governance arrangements and

contractual agreements between a bank with microfinance operations and its related microfinance NGO

Microfinance Through Mobile Technology• Circular 649 (09 Mar 2009)– Guidelines governing issuance of electronic money (e-

money) and operations of electronic money issuers (EMIs) in the Philippines

– Defines e-money as electronic surrogate for cash, redeemable at face value, not a deposit

– Ensures that bank/non-bank EMIs have the necessary capacity (e.g. capital requirements, IT systems and security features and internal controls)

– Ensures compliance to anti-money-laundering rules (e.g. KYC, recording, reporting suspicious transactions, transaction caps, etc.)

– Ensures consumer protection

Microfinance Institution Rating Agencies• Circular 685 (7 Apr 2010)

– Creates an enabling environment for the use of objective, credible and competent third-party ratings of MFIs

– Ensures that MIRAsDemonstrate commitment to comply with relevant

rules and regulationsPossess technical capability, experience and

organizational resources to provide objective and transparent ratings

Use a rating framework that reflects all material facets of microfinance operations, its attendant risks and operational challenges.

– BSP recognition valid for three years and may be renewed

Implementing Various Laws

• Circular 730 (20 July 2011, effective 1 July 2012)– Enhances loan transaction transparency, as mandated in the

Truth in Lending Act– Requires banks to only charge interest based on the

outstanding balance of a loan – Defines effective interest rate and requires that this will be

the only rate used in all loan documents and marketing materials

– Requires a uniform disclosure of the loan terms– Requires banks to post in conspicuous places the revised

format of disclosure statement. The posters shall include an explicit notification that the disclosure statement is a required attachment to the loan contract and the customer has a right to demand a copy.

Implementing Various Laws

• Circular 374 (11 Mar 2003)– Implements provisions on credit delivery for Barangay

Micro Business Enterprises (BMBEs)– GFIs to set up a special credit window that will service the

financing needs of BMBEs either thru retail or wholesale lending

• Circular 570 (24 May 2007)– Allows wholesale loans of universal/commercial banks and

branches of foreign banks to non-bank MFIs as compliance to the 6% mandatory credit allocation to small enterprises

Implementing Various Laws

• Circular 625 (14 Oct 2008)– Implements the Magna Carta for MSMEs:– Mandatory allocation of at least 8% for micro and small

enterprises and at least 2% for medium enterprises of their total loan portfolio for a period of 10 years (2008-2018)

– Submission of compliance reports to BSP on a quarterly basis

Microfinance Exposure of Banks(As of June 2011) No. of

BanksAmount * No. of

BorrowersSavings

Component*

Microfinance Oriented Thrift Banks 3

195.12 28,162

99.82

Microfinance Oriented Rural Banks 6 1,812.65 314,391

1,327.69

Sub-total 9 2,007.78 342,553

1,427.51

Microfinance Engaged Rural Banks 148 3,829.47 530,325.00

1,834.57

Microfinance Engaged Cooperative Banks 21

810.31 78,120.00

248.19

Microfinance Engaged Thrift Banks 20

501.99 12,719.00

243.38

Sub-total 189 5,141.76 621,164

2,326.14

Grand Total

198 7,149.54 963,717

3,753.65

* In Million Pesos

Contact Information

Micro, Small and Medium Enterprise Finance Specialist GroupSupervision and Examination Sub-Sector I

Supervision and Examination Sector10th Floor, Multi-Storey BuildingBANGKO SENTRAL NG PILIPINAS

Mabini, Manila(632) 708-7701 local 2782

(632) 708-7397www.bsp.gov.ph

Gerardo A. ButardoDeputy Director

gbutardo@bsp.gov.ph

Thank you.www.bsp.gov.ph