1.0 Are you a bank or non-bank financial intermediary (NBFI) who looks for cover on your credit risk exposure on micro, small and medium enterprises (mSMEs)?

Small Business Corporaton (SBC) offers its Credit Guarantee Program to encourage financial institutions (FIs) to lend to mSMEs through credit risk-sharing (credit supplementation).  SBC takes the bigger credit risk for a fee called guarantee fee.

Credit guarantees for mSME loans have been around since 1980s.  SBC has redesigned its own credit guarantees in 2006 to tailor the Program to risk-based lending approach.   With the Borrower Risk-Rating System in place, evaluation of accounts for guarantee and pricing of guarantee fees is risk-based.

SBC envisions the Program to be a means of enterprise graduation as it now has a better fit for near-bankable SMEs and for the pre-bankable to being bankable as the Program offers more guarantee options.

2.0 Why should SBC credit guarantees interest a bank or NBFI?

If a bank wants to expand its business of mSME lending, it needs a protection for the various credit risks attendant to it.  SBC credit guarantee on SME loans only carries a risk weight of 20% which provides savings in terms of loan-loss provisions. 

SBC’s credit guarantee facilities directly address various credit risks of financial institutions in mSME lending and provide a better fit for mSME borrowers in their own stage of growth. 

3.0 What are these credit guarantee facilities of SBC?

• Guarantee for Gearing-Up Enterprises without Collateral (SME-GEAR)   - for unsecured loans
• Guarantee for Growing Enterprises with Partial Collateral (SME-GROW) - for loans that are partially secured; where SBC guarantees the unsecured portion
• Guarantee for Gainful Enterprises with Available Collateral (SME-GAIN) - for loans that are fully secured but have some credit risk concerns where guarantee cover is on the entire loan (plus the secured portion);   SBC shall share on future collateral recoveries on pari-passu basis.

4.0 What are the terms of SBC credit guarantees under these various credit guarantee facilities?

Below is a table which shows different guarantee covers and percent risk shares of a participating financial institution (PFI) under the Program.  The Program provides higher guarantee cover for PFIs with BRR system, consistent with BSP Circular 439, Series of 2004. 

SME-GEAR

SME-GROW

SME-GAIN

Under the SME GROW, the value of unsecured portion of the loan guaranteed may be adjusted at most annually based on PFI’s collateral valuation review, but applicable only for real estate mortgage. 

SBC shall issue a certificate acknowledging the said adjustment to be the basis for computing the guarantee fee for the period.  The guarantee ceiling or 70% of the unsecured portion, whichever is lower, shall remain.

5.0 Should you be interested in participating under the Program to avail of SBC credit  guarantees, please check yourself vis-à-vis the Program’s Eligibility Criteria.

• Must be a financial institution which may include banks and finance and leasing companies
• Must have latest CAMELS Rating of at least “3” , if applicable
• Must have an operational mSME lending unit
• Positive net income for the past two years
• Past due rate of not more than 20%
• Risk-based capital adequacy ratio of at least 10%
• Must have no negative credit record
• Preferably, the bank has a BRR system that complies with BSP standards

6.0 What particular accounts can qualify under the Program?

Credit Guarantee Program’s Eligibility Criteria

• Must be at least 60% Filipino-owned mSME per DTI or SEC registration
• Must have assets size of not more than P100 million exclusive of the value of land where the project is located
• Must have positive income for the past one year and debt-equity ratio of not more than 80:20 based on BIR-filed financial statements
• Must not belong to SBC’s exclusionary list of industries:
  
  

• Real estate development (MSME contractors are qualified) ;
• Pure trading of imported commodities (unless value-added services are employed which impact positively on the domestic market); and
• Vice-generating activities

7.0 How should we package mSME loans to be eligible under the Program?

• Loan size should be up to PFI’s discretion, provided that it is justified by the BRR of the account.
  
  
• Working capital loans must be packaged as credit line that is either:
  

• Transactional – which requires an assignment of proceeds of the receivables and/ or inventory
• Non-transactional – which requires mSMEs to have a financial recording system well-maintained by its accounting unit

(mSME borrower’s total working capital financing inclusive of that of the PFI should not exceed 80% of the AR level and/ or 50% of inventory level, net of past due AR and obsolete inventory.  The credit line guaranteed by SBC may be reduced to keep within the working capital financing ceiling relative to AR and inventory.  Should the SME borrower’s working capital requirement decrease, part of the credit line principal balance must be repaid.  A decrease in credit line limit may be implemented half way through the life of the loan should the circumstances of the SME merit such, only applicable to SMEs with a BRR of “5” which requires semi-annual monitoring.)

• Credit lines may have a life of not more than one year.  Tenor of availments shall be based on the transaction to be financed, and may not exceed 360 days.
• Amortized term loan should be packaged for financing of fixed asset acquisition or construction.
• The loan’s repayment term should have proper matching with the subject of financing.

Other guarantee facility requirements

• The period of guarantee cover on amortized term loans for fixed assets in the nature of land and building construction shall be for a maximum of five years.
• For equipment acquisition, the allowed term shall be shorter.  For brand new units, the term shall not exceed five years.  For second hand or reconditioned units, the term of the loan shall be limited to 70% of the remaining economic life or at most three years, whichever is shorter.  The period of the guarantee cover shall correspond to the term of the loan.
• Financial leases or lease purchases shall also be considered as fixed asset acquisition, thus, must be on an amortized term loan basis.
• Grace period on principal shall be allowed up to two years in the case of fixed asset acquisition and up to one year only in the case of equipment acquisition.
• At most 25% of the loan may be used to finance land acquisition.
• At most 50% of the loan may be sued for loan refinancing.  The loan to be taken out should be on current status and not previously restructured.
• Portfolio ceiling per PFI in terms of SBC’s contingent liability shall be at 50% of the SBC single borrower’s limit (SBL) for the unsecured loans, equal to 25% of the SBC net worth.
• The same portfolio ceiling shall be adopted on a per industry basis.

8.0 When do we make a call on SBC credit guarantee?  How do we go about it?

• A PFI may call on the guarantee once loan default occurs based on PFI originally approved, extended or restructured maturity date or amortization due date, as the case may be  SBC policy is that guarantee call shall be on a per defaulted PN basis to implement the “early call feature” under the redesigned Program.  (Default follows the same definition of BSP.)
  
  
• For amortized term loans released in tranches, the call shall similarly be based on a per PN basis at the option of the PFI.
  
  
• Call on the guarantee must be made within 120 days prescriptive period from day-1 of the default of the guaranteed loan.
  
  
• PFI may opt to restructure the defaulted loan, but it must do so within 120 days from date of default.   SBC percentage guarantee cover shall remain the same unless there is a need for deduction due to PFI’s non-compliance with reporting covenants.
  
  
• SBC shall have an option to call on the collateral under the SME-GAIN by declaring the entire loan in default on the basis of a cross-default on the remaining un-defaulted PNs to protect the value of the collateral.

9.0 What is the responsibility of the PFI in loan monitoring?

Account monitoring covenants and sanctions

• Under the covenants of the guarantee approval, the PFI shall be required to conduct a BRR review that includes a project visit to the SME borrower, and to make a timely report to SBC.  This allows for an early response from SBC in case of BRR deterioration.
  
  
• The monitoring schedule shall be BRR-based, as follows:

1/ Financial statements basis of review preferably not more than 6 months old; should not be more than one year old.

• For PFIs not amenable to conducting a semi-annual project visit on its accounts with a BRR of “5”, the guarantee cover shall be reduced by ten percentage points at the start of the guarantee cover.  (The clean-loan or collateral-shorts guarantees shall be at 60% instead of the standard 70%; and the collateral-sharing guarantee shall be at 70% instead of the standard 80%.
• A semi-annual CI update shall remain a must for accounts with a BRR of “5”.

• The BRR review and/ or CI update should be submitted within 30 days from the deadline for the conduct of the BRR review and/or CI update.  Non-submission to SBC of the required reports within the deadline shall be considered as non-implementation.  Specific timelines shall be indicated by SBC in the notice of guarantee approval/
  
  
• The BRR review should not be more than 90 days old at the time of submission to SBC, while the CI update should not be more than 60 days old.
  
  
• For PFIs with no BRR system, the SBC prescribed BRR review report shall be used instead.
  
  
• Non-compliance of the account monitoring covenant shall result in deduction in the guarantee cover based on the following schedule:

Account deterioration reporting and sanctions

1. Any incidence of default should be reported immediately to SBC. A 30 day period shall be observed for this reporting.
   
   
2. Late reporting of the default incidence when call on the guarantee is made shall result in 10 percentage point deduction in the guarantee cover.

10.0 What is SBC’s responsibility in ensuring an efficient guarantee call process?

• SBC commits to issue a Certificate of Completeness of Credit Documents within not more than 90 days from the date of effectivity of the guarantee cover.
  
  
• SBC shall observe a 30-day deadline for its issuance of the Certificate of Completeness of Credit Documents to do necessary review of documents on each availment of credit line.  SBC gives the PFI another 30-day deadline to perfect or regularize on the documentation requirements, otherwise, the guarantee cover shall collapse.
  
  
• SBC commits to pay the call on the guarantee within 30 days, provided that guarantee fee payments are up-to-date and the covenants of the guarantee are all complied with.  Any non-compliance to account monitoring and reporting covenants should not result in delay in payment of guarantee call, only the appropriate deduction.

11.0 What does the SBC guarantee cover not include?

• Promissory note or drawdown from a credit line that has been given an extension of maturity date beyond 360 calendar days from the original date of the PN.  
  
  
• Succeeding loan releases or PNs under a guaranteed credit line that have been extended on their maturity dates approved by the PFI, shall continue to be covered by the guarantee, provided these are released within not more than 90 days from the original maturity date of the extended PN.                           

  (If the extended PN is paid within 90 days from the original maturity date, then the exclusion from the guarantee cover shall be lifted.  This ensures that SBC guarantee cover shall continue in effect on all prospective loan releases, unless there is once again an extension in maturity date of any of the succeeding PNs.   Lifting of the ban or exclusion from the guarantee cover may be negotiated with SBC if such action will redound to better servicing by the borrower of the guaranteed credit line.)

• Any change in the terms of the guaranteed loan without prior SBC approval upon restructuring shall results in the exclusion of guarantee cover.

12.0 What if the PFI wants to get back any of its guarantee paid account from SBC is this possible?

The PFI may opt to execute a Deed of Undertaking with SBC for a loan-buy-back of accounts with guarantee call paid, and which SBC has been able to make a turn around to a BRR of “5” or better as validated by the PFI.

13.0 What does SBC require the PFIs to submit when calling on its credit guarantee?

• SBC Certificate of Completeness of Credit Documents
• Latest BRR Report (Must not be more than six months ago from the date of call on the guarantee)
• Certificate of Updated Guarantee Fee Payment
• Bank’s Property Search on the mSME borrower
• Deed of Undertaking by the bank to offer a buy back option of any account whose guarantee was called and paid by SB once the account or enterprise has been revived by SBC and whose BRR has been restored to “5” or better, as validated by the bank

14.0 If the PFI is ready to apply for accreditation under the Program or ready to submit mSME account for credit guarantee, please call:

Mr. Hector M. Olmedillo
Vice President
Institutional Markets Finance Group
751-1888 local 1730