The Monetary Board approved on 21 November 2002 a lower risk weight for banks’ SME and Microfinance loan portfolios that meet prudential standards. Under the new ruling which modifies Circular No. 280 dated 29 March 2001, qualified SME and microfinance loan portfolios are now assigned 75 percent risk weight, from the 100 percent risk weight originally provided under the said Circular. The reduction is based on the treatment of SME loans in the proposed New Basel Capital Accord which is expected to be implemented by the banking supervisory authorities worldwide in 2006. The New Basel Capital Accord contemplates a 75 percent risk weight for exposures to SMEs.
Under existing BSP regulations, SMEs are business enterprises engaged in industry, agri-business and/or services, whose total assets (exclusive of land) do not exceed P1.5 million for micro, P15 million for small, and P100 million for medium-scale enterprises. Exposures to SMEs may be in the form of direct loans or committed credit line.
To qualify for the lower risk weighting, the SME portfolio must consist of claims from SMEs in the form of direct loans or commitments. Such defined SME portfolio must be highly diversified, i.e., it must have at least 500 accounts that are distributed over a number of industries. Moreover, the past due ratio of the defined SME portfolio must not exceed 5 percent.
The lending bank, on the other hand, must have adequate risk management process approved by its Board of Directors, which shall include, as a minimum, a rigorous credit approval process and an adequate loan tracking system. In addition, it must be financially sound and in compliance with major prudential requirements, including the required minimum capital adequacy ratio.
The reduction in risk weight of qualified SME portfolio would enable banks, based on the existing capital, to support a 33 percent potential expansion of SME and microfinance loans. This should further boost the SME sector, and thus help promote the growth and development of the small and medium enterprises throughout the country.