The Need for Non-Traditional Approach to Lending
Start-Ups Demand More Flexibility in Credit
May 7, 2009
In the light of the global financial crisis, more and more people are hoping to start their own businesses. But the banking industry seems not in the mood to listen. A random check with banks such as HSBC, Metrobank, PSBank, and LBC reveals that they still have the same (long) list of requirements for potential borrowers. This list includes certificate of employment or [current contracts for overseas Filipino workers (OFWs)], proof of income for the past six months, audited financial statements (if self-employed or engaged in business), and proof of billings on credit cards, among others.
The above may seem straight-forward at first but for someone who lost his job or was terminated, he already has slim or even zero chance of getting a loan. Ironically, those who urgently need the banking industry’s faith are those who just lost their jobs and who are keen on starting their own businesses.
Banks Close their Doors on Aspiring Entrepreneurs
Ms. D. Santos (who requested anonymity), an OFW who was just terminated from her job in Dubai, expressed her disappointment: “I have a good business idea and need help in capitalization. But I have approached three banks already and all of them require proof of employment or current contracts! It is becoming ridiculous. I told them, ‘the reason I need a loan is because I no longer have a job and the only way I can sail through this global financial crisis is to start on my own!’ Unfortunately, these banks think that those who lost their jobs are not worthy of their trust. It is pathetic!”
Another OFW who also requested anonymity shared that even a so-called “SME-friendly bank” has the same long list of requirements. “The bank’s website stated that their SME loan can be accessed by start-ups. So I approached the local branch manager in my hometown with high hopes because I lost my job in Taiwan and was hoping to start a small internet café. Unfortunately, the branch manager said that this type of loan requires collateral and mind you, they will not accept agricultural lands as collateral. But this is the only asset that my family owns!. Ironically, too, the loan should be in the range of 1-million pesos. What kind of policy is that? I just need a small amount!”
Similar stories happen elsewhere. The two OFWs above are still jobless and so far, no one is listening. If they were given a chance five or six months ago, their businesses would probably be thriving now and their banks joyously counting their money too.
The Global Financial Crisis as Reason for Caution
Banks may have real reasons to be more cautious. After all, world economies are still shaky and more people are still losing their job. Banks say this is not a good time to increase risks in lending. But if they continue with such way of thinking, wouldn’t it hurt the economy more? Wouldn’t this attitude cause complete loss of faith in the banking industry and eventually lead to the industry’s downfall?
In the meantime, aspiring entrepreneurs who have brilliant ideas but lack capital, remain as unproductive members of the society.
Need for Non-Traditional Approach to Banking
Banks may want to consider taking the non-traditional approach. There is no guarantee for success but the experiences of aspiring entrepreneurs may provide some insights.
For instance, banks may review their restrictive requirements such as the proof of employment or current contract. They may substitute this with requirements for a sound business plan or even a simple income projection. This way, those who lost their jobs and hoping to start their own business still hold the chance to qualify for a loan.
Another requirement that should also be revisited is the proof of credit card billings. Some people have already learned that having a string of credit cards is not always good. Some even swore not to use them again. But if this becomes a requirement for loans, it is like encouraging people to rely more on loans rather than on savings. Why not replace this with proof of a savings /current account or the issuance of post-dated checks? However, consideration should also be given to their bank balances. Normally, start-ups need to go to the bank because they don’t have enough cash. So banks should not expect them to have a million pesos in the bank.
Secondly, credit investigation is good but is also restrictive. A personal approach may be more SME-friendly such as doing personal interviews with lenders themselves and their friends/ families. Simply put, there are things that a bank cannot see in voluminous documents but can easily be ascertained when face-to-face with a client. Also, some people in one way or the other may have had experienced financial crises in the past and credit investigations will show that but they, too, deserve a second chance.
A non-traditional approach to lending, therefore, needs a more serious look. The banking industry will become more SME-friendly if genuine access to credit is actually given rather than remain as lip-service.
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