President Rodrigo Duterte has signed the Personal Property Security Act (PPSA) that will boost access to credit to micro, small and medium entreprises (MSME) and farmers and fisherfolks as well as improve competitiveness in the country.
The landmark law simplified and harmonized the Chattel Mortgage Act of 1906 and other fragmented and outdated financing regulations in the country by enabling borrowers to secure financing using non-traditional collateral such as account receivables, inventory, warehouse receipts, crops, livestock, machinery and equipment.
This new law, Republic Act No. 11057, also established a unified, centralized online noticed-based collateral registry that will be lodged in the Land Registration Authority and clearer priority rules in case of foreclosure, among others. This will provide protection and more confidence to banks and financial institutions in lending to the agriculture sector and MSME.
MSME comprise 99.6 percent of total businesses in the country, of which 96 percent are micro businesses.
“President Duterte signed this measure into law in sync with his vision for sustained high growth and greater financial inclusion,” Finance Secretary Carlos Dominguez III said.
Dominguez said that SME financing is considered unattractive, given the perceived higher risks without traditional collateral such as land and other real property, making it difficult for MSME to meet bank requirements to get loan approvals.
The new law will help boost economic growth, he said, because access to financing is critical to higher productivity of the MSME and agriculture sectors, which, in turn, could lift millions of Filipinos out of poverty and accelerate more inclusive growth in the countryside.
In case of default, borrowers and lenders may opt to put movable collateral for private sale.
Any excess amount from the proceeds after the settlement of debt obligations may be handed back to the borrower. In turn, the reform will result to increased access to credit of small businesses and farmers, lower borrowing costs, reduced risk of non-payment of debt, and lower rate of non-performing loans of financial institutions.
According to Finance Undersecretary Gil Beltran, the reform will “provide the framework for the use of assets other than real estate for MSME and agribusiness to access finance.
Beltran said, “It will lead to the development of a professional, regulated warehousing industry that issues receipts that can be used as collateral and can be traded by investors and industry players, and develop the backbone of an efficient commodities market that will stabilize prices and expand transactions.”
In 2012, the Department of Finance (DOF) led the Technical Working Group (TWG), which is composed of diverse stakeholders from the private and public sectors and which eventually came up with a framework document that provided recommendations on how to pursue a best practice movable collateral reform in the country.
The LRA adopted these recommendations and enhanced its registry and moved towards aligning it to international best practices.
The International Finance Corporation (IFC), which is a member of the World Bank Group, with support from the governments of Japan and Canada plus the Secretariat for Economic Affairs of the government of Switzerland (SECO), provided technical and financial assistance to the movable collaterals reform.
Subsequently, the TWG co-led by the DOF and the LRA proceeded with the drafting of the bill to reform the secured transactions system in the Philippines.
Senator Paolo Benigno IV filed last July 2017 Senate Bill No. 354, otherwise known as the “Secured Transactions Act.” A counterpart bill was filed in December 2017 by Representatives Ben Evardone of Eastern Samar and Arthur Yap of Bohol– House Bill No. 6907 entitled the “Financial Inclusion Act.”
The PPSA supports Duterte’s 10-point socioeconomic agenda, particularly increasing competitiveness in the country. The passage of the law is expected to strengthen the country’s position in the ‘Getting Credit Indicator’ of the Ease of Doing Business Survey of the World Bank, where it is ranked 142 among 190 countries in 2017.
“This law is indeed a big milestone in increasing access to finance for MSMEs and farmers in the Philippines and a true collaborative effort from the public and private sectors to promote the growth of MSME and agribusiness,” said Yuan Xu, IFC Country Manager for the Philippines. “This is only the first step, and more work will be needed to support financial institutions to lend more to MSMEs and farmers.”
“With a sustained effort and ownership from all partners including the private sector, and leadership from key government agencies especially DOF and LRA, the country can achieve a more competitive and sustainable growth,” the IFC manager added.