Inclusion

Nearly two decades ago, when I was serving with the DBP, the BSP asked us to look into the 5-6 lending business and find ways to displace it with a government program for small borrowers.

We studied the phenomenon. We saw this was a billion-peso industry employing thousands of lenders/collectors inhabiting the streets and developing close relations with their market. The market was composed of vendors who borrowed a small amount at very high rates. The borrowings provided them capital and enabled them to actually profit.

If the small-scale borrowers did not profit from this scheme, the 5-6 lending industry would have died long ago. If the lenders managed to recoup their money, even in the absence of collaterals, then the system worked. Usurious as the rates may be, they adequately covered risks and delivered working capital to a section of the market that would have otherwise been excluded from the formal financing institutions.

We concluded there was no way a government bank could displace the existing scheme. To begin with, we were not allowed by law to lend without taking collateral. Given the salary scale of our bank personnel, there was no way we could enter this market segment and expect to make any money. The greater likelihood was that we would lose money and get fired for incompetence.

We reported back to the BSP. The 5-6 system somehow worked and brought some degree of financial inclusivity. The problem was how to properly tax the huge profits made by the lenders in this scheme. But that was not a bank problem. That was for the BIR to solve.

Our regulatory masters understood. The matter was never brought up again.

I am not sure if the BIR solved its end of the problem: properly taxing the billion-peso daily turnover in the 5-6 market.

Online lending

Apparently, the revolution in digital technologies caused a mutation in the small-scale lending business. Small-scale borrowers, often without property to their name, could borrow online without having to turn over any collateral.

Apparently, too, online lending works. Otherwise, there would be no proliferation of online lenders. There is a market out there this scheme caters to, a market that was otherwise excluded from the formal financial system. In all probability, the big-time 5-6 lenders are involved here as well.

In the traditional, pre-technological 5-6 system, collectors on small motorbikes were constantly badgering the small borrowers to pay up. I am nearly sure there was some form of intimidation employed in this scheme – if that was necessary for the lenders to recover their money.

Last month, it was reported that the National Privacy Commission (NPC) has been deluged with complaints concerning the online lending outfits. Apparently, small borrowers who did not exercise credit discipline found themselves hounded online by the people who lent them money without collateral. The complainants said their data privacy rights were being violated.

 The NPC forwarded the complaints to the Securities and Exchange Commission (SEC). The SEC, for its part, raised legitimacy issues against online lenders that had no known business addresses. Their lending operations were based almost entirely on online applications.

The SEC has since published notices requiring the directors and officers of the online lending outfits to appear before it. The Commission threatens “appropriate actions” against those who fail to materialize.

What would constitute “appropriate action” we can only surmise. Online lending, built on new technologies, is very likely an unregulated activity. The burden for regulating this new type of business activity falls squarely on the shoulders of the SEC.

The SEC may regulate the online lending business by requiring more documentation. That might be difficult to do, of course. Lending money is not per se illegal. In fact, lenders assume all the risks when they deliver money to borrowers without collateral. Moneylenders will have to exercise persistence and creativity to ensure they are repaid.

  True, we could probably set boundaries on what lenders can do to get their money back. But those boundaries should not kill the business. I am sure there are more beneficiaries from online lending services than there are complainants.

This is akin to the dilemma we have with the more traditional 5-6 businesses. They might be charging usuriously, but without them a great number of small entrepreneurs will be cut off from financing. The economic damage arising out of the suppression of 5-6 activities will be immensely greater. It will shut out a large section of our population from the financial services sector.

As a banker, I could not be sympathetic to those who fail to exercise credit discipline, who would not exert effort to pay back what they borrowed or who unwisely lost the capital lent them. Protecting those who fail to exercise credit discipline will bring down our financial system and cause greater harm to the majority.

On the other hand, those who lend money as a business (especially where no collateral is taken) have the responsibility to undertake due diligence and understand the borrower’s capacity to repay. But since lenders assume all the risks, regulating them is the lesser problem. It is not in the natural course of things that lenders run away from the borrower.

I am sure there are fine policy options the SEC may take without resorting to shutting down online lending activities across the board. Online lending is clearly a creative business initiative. It takes advantage of business opportunities brought about by new digital technologies. It helps make financial services more accessible to our underserved sectors.

Let this flourish.