There was the news the other day on the call of PBBM for private businesses to help MSMEs. While that was laudable, it should have been directed first and in a stronger manner to the government. Specifically to the Central Bank.
The biggest problem of MSMEs is capital. If you don’t have that kind of problem then you are not an MSME. You might not be in business or you have plenty of money you don’t have to worry about financing arrangements.
How can the government help? One way is to make capital easily available to small businesses at reasonable rates. As of now, if you are not a prime client of a big commercial bank, chances are you are quite familiar with the phrase “kapit sa patalim.” It means you will take high interest financing offers even at almost usurious interest rates.
As of now the rediscount rate the Central Bank charges small banks and other lenders is quite high. The amounts are then lent to retail borrowers. Naturally, the small banks and other lenders will add some interest charges to take care of their own margins and costs. Thus, small borrowers end up paying relatively high interest rates.
For instance, rural banks when they avail of the rediscount window of the Central Bank, might be paying an interest rate of 1% per month or 12% per annum. When a rural bank lends the same amount to retail borrowers, they might be charging about 16% per annum plus other charges. The borrower would end up paying an interest rate of 18% to 20% per annum. That is relatively big.
On the other hand, prime clients of big commercial banks with good credit history might be charged only 6% per annum. See the big difference?
Why can’t the central bank lower its rediscounting rate to 4% per annum so small banks and other small lenders like cooperatives will charge only an annual interest rate of 6% per annum? This will be competitive to the interest rate prevailing in stable developed countries and will also mean lower cost of money to borrower-MSMEs as long as they can offer good collateral.
Surely a lot of business activities will be generated which will mean higher employment opportunities, higher collective income, and other multiplier effects.
The argument the central bank may raise against this is the danger of fueling inflation or high prices, etc.
Such effects are the same as those of the inflow of big foreign investments which we are desperately courting. But high prices are the things we might have to bite and are not necessarily bad as long as people have jobs and good income.**