Philippines: Microfinance Risks Abound

Oct 2009
New Manila, Philippines, October, 20 2009 - Microfinance may be a promising alternative source of income for the big banks but the business remains risky in nature, global debt watcher Moody’s Investors Service warned.

In its Weekly Credit Outlook, the US-based credit rater noted that the entry of large local banks into microfinance, which has long been dominated by the rural banks, is understandable given the good income prospects from the business.

"Over the last decade, competition and dis-intermediation have narrowed the major banks’ net interest margins to about 4% from over 5%. Rural and cooperative banks’ net interest margins averaged 9.67% in March 2009," Moody’s said.

Rural banks, along with nongovernment organizations, are among the most active players in the microfinance industry.

Microfinance loans could be as low as P4,000 but should not exceed P150,00 per borrower.

Lending rates are normally higher as borrowers, who are often poor, are not required to present income tax returns or collateral. The repayment rate is also higher as borrowers may pay on a daily, weekly, monthly or bi-monthly basis, depending on borrowers’ cash flow.

But Moody’s said higher earnings from microfinance are not without risks as bad loans could climb given the vulnerability of micro-borrowers to adverse economic conditions.

It pointed out that the non-performing loans of rural and cooperative banks are at 10.6% of total loans as of March compared to only 4% among universal and commercial banks.

Moody’s also noted that microfinance differs from the big banks’ usual lending business.

"Despite the fat margins, the highly personalized nature of the business and small size of the loans require significant resources and customers to earn meaningful revenues," Moody’s said.

The big banks lack the distribution network and while acquisitions may address this, there is the matter of weak rural banks.

"[T]he much-publicized failures of rural banks due to poor governance and weak fundamentals are likely to make buyers wary, unless prices are compelling and regulatory concessions are offered," Moody’s said.

"Furthermore, their generally modest size implies that multiple acquisitions may be required to achieve meaningful scale."

Universal and commercial banks are dipping their hands into microfinance.

Yuchengco-led Rizal Commercial Banking Corp. (RCBC), the seventh largest lender in the country, acquired Batangas-based Pres. Jose P. Laurel Rural Bank, Inc. in February and and Merchants Savings and Loans Association, Inc. last year, with the intention of using the two as its platform for microfinance.

Mid-sized Asia United Bank recently bought Pampanga-based Rural Bank of Angeles, also for the same purpose.

Ayala-led Bank of the Philippine Islands (BPI), the third largest bank in the country, is expected to commence its mobile microlending operations this month by transforming its subsidiary Pilipinas Savings Bank into a mobile microfinance bank.

It is embarking on this undertaking with Ayala Corp. and Globe Telecom, Inc. It will use Globe’s electronic mobile money transfer platform in extending both wholesale and retail loans.

"Capitalizing on technology could lower delivery cost and overcome limitations in distribution," Moody’s said.

Despite the risky nature of microfinance, Moody’s said BPI’s entry into the business will not have a negative impact on its capability to pay its obligations given its "measured approach" to its business.

Source : Business World

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