Risk-Based Lending

Manila Bulletin, September 16, 2010 | Go to article overview

Risk-Based Lending


"We commit to work for the implementation of credit assessment models more focused on the borrower-enterprise itself, and less dependent on capacity to put-up collateral. We acknowledge that the collateral culture has for a long time restricted the growth of MSME finance in the country and other parts of the world. Now, there is an urgent need to go beyond the present collateral mentality, and to build more responsible and responsive credit system."With this pledge, the Small Business Corporation aimed to forge a commitment among government, domestic and international development agencies, chambers of financial institutions, small and medium enterprises (SMEs) industry associations, business development service provides, civil society organizations and other development-oriented interests for a Risk-Based Lending Movement. This movement was launched in 2008.For a long time now, the financial institutions' focus on collateral has been an oft mentioned hindrance to the entrepreneurs' access to much needed funds. Sadly, this has considerably limited their opportunities for expansion and growth. The Risk-Based Lending Movement aims to remove the ties that bind the debt -collateral mentality to the present credit and financial system in our country. It will establish a viable and progressive system that will ensure the Philippine SMEs access to financing. It will advocate a credit assessment model that focuses on the enterprise itself rather than the entrepreneur's capacity, or lack of it, to put up a collateral to secure his loan. To balance the beam, so to speak, it also aims to promote financial literacy and transparency among the SMEs to complement the financial institutions' adoption of a fair and more progressive credit assessment stance.The motivation behind this campaign is the realization that there have been major advancements in the assessment of SME loans that should now be adopted in the local scenery. The credit appraisal technology for SMEs can be re-engineered using some of the modern tools like portfolio approach, program lending, cash flow lending and credit scoring methodology. We have to learn from international best practices. Instead of reinventing the wheel, we should carefully examine what has worked elsewhere and what hasn't worked.Modern credit risk analysis tools allow better analysis of the probability of borrower default. …

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