Pinoy Business Coach

Taking out loans with no collateral is now possible, thanks to the use of a new risk rating system

By the third quarter of 2009, select rural banks will start accepting loan applications from micro, small and medium enterprises (MSMEs) even if they only have little, or do not even have any, collateral to show.

This is through an agreement forged by the government financed lender Small Business Corp. (SB Corp.) and the Rural Bankers Association of the Philippines (RBAP) promoting the use of the borrower’s risk rating (BRR) system in assessing the loan application of MSMEs instead of the traditional collateral-based scheme.


Benel P. Lagua, SB Corp. president and COO, told Entrepreneur that the BRR system was developed by the agency in 2006 through a technical assistance loan from the Asian Development Bank.

“It’s a modified credit scoring system that helps analyze the paying capacity of potential borrowers irrespective of the collateral. SB Corp. has been using this BRR since the latter part of 2006 and it has helped a lot in the improvement of the quality of our accounts,” Lagua said.

Through this system, the MSMEs only need to fill out a loan application form, submit the required documents such as the business registration and the financial statement, and then just wait for the rural banks to make the assessment. Using the BRR, the banks will know the capacity of the borrower to pay, the risk rating, the amount that can be lent, and the interest rates to be applied.

“The banks will know if the loan is risky, moderate, very risky or safe. Then there will be the corresponding interest rates. In the case of SB Corp. our interest rates range from 9 percent to 13 percent (per year). So if you are deemed as very risky, you will probably get the 13 percent interest rate,” Lagua explained.

The role of the partner banks

To bring it closer to the communities, Lagua said they decided to talk to RBAP for the rollout of this project, since the rural banks are the ones that really touch base with the MSMEs, especially in the provinces. If the rural banks will use the methodology correctly, they will be able to lend more to SMEs without the need to put emphasis on the collateral.

Lagua said the company has picked 10 rural banks to pilot the program, and by the end of the year, at least three of them will be using the BRR system already. In a span of five years, he said, at least 100 rural banks should be onboard.

The first 10 banks will receive training on how to use the BRR system. Though the training cost seems expensive at P500,000 per bank, the expense will be shared by SB Corp., the participating banks and international donors.

Further, Lagua said SB Corp. will not impose on their partner banks the interest rates that they will use because it should be dictated by the market.

“We want to encourage them to lend to MSMEs. The mentality now is that loans should be based on collateral. The BRR approach will allow them to lend even without the collateral,” he said.

Of course, the banks will have to do the due diligence and validate the claims of the borrowers by talking to their suppliers and customers, among other ways. Assuming the documents are complete, Lagua said the loan can be released in one month.

SB Corp. devotes about 30 percent of its wholesale lending facility to their rural bank partners. This year, the agency has an available fund of P4.5 billion for lending.

“We expect the rural banks to have a big portion of the lending because by design, they are closer to the community so they know the MSMEs better,” Lagua said.

*Great news indeed, the access to capital will be greatly enhanced for the MSMEs.