By Luisa Maria Jacinta C. Jocson, Reporter

THE MANDATED lending quota for innovation development on banks may lead to a surge in nonperforming loans (NPLs) and to banks opting to incur penalties than meet the requirement, analysts said.

“I’m more concerned about the implications on NPLs, which has been trending higher in recent months. Micro, small, and medium enterprises (MSMEs), especially start-ups, have a certain risk profile that might lead to higher NPLs for the banks,” AP Securities, Inc. Research Head Alfred Benjamin R. Garcia said.

Under the Philippine Innovation Act, all public and private banks are required to set aside at least 4% of their total loanable funds for innovation development credit.

The Bangko Sentral ng Pilipinas (BSP) recently released draft implementing rules for the law.

Based on the BSP’s draft rules, borrowers eligible for innovation development credit include “MSMEs, startups, innovation centers, business incubators and other entities that facilitate and support the development of new technologies, product innovation, process innovation, organizational innovation, and marketing innovation.”

Mr. Garcia noted the risk of higher NPLs if banks ramp up lending to small businesses.

Latest data from the BSP showed that the banking industry’s gross NPL ratio slipped to 3.47% in September from the over two-year high of 3.59% in August. However, it was still higher than 3.4% in the same period in 2023.

Bienvenido S. Oplas, Jr., president of a research consultancy and of the Minimal Government Thinkers think tank, said these kinds of mandates are the “bane of innovation and finance liberalization itself.” 

“Take the mandatory 25% of banks loanable amount to be allocated for agriculture via the Agri-Agra law. Banks would rather pay the penalty for not reaching that mandatory 25%,” he said in a Viber message.

Separate BSP data showed that loans extended by Philippine banks to MSMEs reached P488.13 billion as of end-June. This accounted for only 4.52% of their total loan portfolio of P10.8 trillion, well-below the required 10% quota.

Under the Magna Carta for MSMEs, banks must allot 10% of their loan portfolio for small businesses. Broken down, 8% must go to micro and small enterprises while the remaining 2% goes to medium-sized businesses.

However, banks have long opted to incur penalties for noncompliance instead of taking on the risks associated with lending to small businesses.

“This mandatory 4% of loanable amount for innovation is another bane. Some banks can easily fill that while others won’t be able to, so they will be fined by the BSP,” Mr. Oplas said.

He warned against similar mandates and overly regulating banks.

“The government does not need legislation to mandate that people should eat, should sleep, should take vacation. People do it on their own without government mandate because it’s the right thing to do for themselves,” he said.

“So, I do not think this law will achieve its goal without creating economic and (financial) distortion somewhere. The BSP can only minimize the distortions by liberalizing as many sectors as possible to be qualified as ‘innovation’ loans,” he added.

On the other hand, Mr. Garcia said although the 4% quota may be considered small, this is equivalent to more than P700 million.

He also said banks would likely be able to meet the lending quota.

“However, it’s a good thing that the definition of funding provided for innovation development is quite broad and includes investments in equities of startups so it shouldn’t be a problem for banks to meet the quota.”

Under the draft rules, the BSP identified the modes of compliance with the mandatory credit requirement, namely direct and alternative compliance.

Direct compliance covers loans granted to qualified borrowers after Aug. 6, 2019 for innovation development.

Meanwhile, the allowable alternative compliance include investments in bonds issued by the Development Bank of the Philippines and Land Bank of the Philippines with proceeds used exclusively for on-lending for innovation development, as well as in debt securities with proceeds going to innovation development, and loans to or investments in financial entities, excluding banks, that provide supply chain financing for MSMEs that promote innovation.

Investments in the equities of startups can also be counted as compliance with the credit quota, among others.

The draft rules also detail penalties for noncompliance or under compliance with the credit quota.

These penalties shall be computed at one half of 1% (0.5%) of the amount of noncompliance or under compliance and will be directed towards innovation development.