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Update 10: SEDPI Rapid community assessment on the impact of COVID-19 to nanoenterprises

Two months after the government started easing lockdowns in most parts of the country, 36% of nanoenterprises reported to have bounced back to pre-pandemic level. In May, only 18% expected to bounce back within one month which may be a good sign of recovery if the spread of the virus is contained.

Nanoenterprise (NE) is a SEDPI-coined term that refers to unregistered livelihoods of self-employed individuals. They typically operate informal businesses alone or with the help of unpaid family members targeting their own immediate local communities.

Status of nanoenterprises

Those that bounced back report that they are already able to earn about the same income; and experience normal demand to their products and services. For the month of June, there were twice as many nanoenterprises reporting slowdown in sales compared to those that reported strong demand.

Access to supply on inputs needed to operate their livelihoods remain stable.

Financing options

Nanoenterprises typically access loans from informal sources which make them vulnerable to predatory financing practices. Most of them borrow money from cooperatives, rural banks, microfinance NGOs and pawnshops.

On average, nanoenterprises borrow a small sum of money ranging from PhP3,000 to PhP10,000 to finance their livelihoods such as sari-sari stores, carinderia, farmers, fisherfolks, dressmaking and vending. Microfinance institutions offer collateral-free loans to them payable in three to six months with interest rates ranging from 2% to 5% per month.

With microenterprises cautious on demand, they prefer not to access loans. Only two of three of those who finished their loans opted to renew their for another cycle. This is also a sign that nanoenterprise have the ability to weigh risks and returns.

For the month of June, when normal loan collections resumed, one in three nanoenterprises was able to repay in accordance with amortizations based on the Bayanihan Act’s loan deferment schedule. A majority are requesting for up to two months additional grace period to allow them more time to adjust and cope with the new normal.

Essential financial service to low income group

There are approximately 8 million low income households that access microfinance services in the Philippines. MFIs are frontliners in the delivery of financial services to low income groups who find it difficult to open deposit accounts and access loans from commercial banks.

SEDPI estimates that a PhP40B economic assistance to nanoenterprises channeled through MFIs will address their financing needs to jumpstart their livelihoods. This is based on 8 milion estimated number of microenterprises and PhP5,000 economic assistance package.

The proposed Philippine economic stimulus package contains a total of PhP245 billion budget to assist micro, small and medium enterprises. Only a small fraction of this is expected to reach nanoenterprises.

Prioritizing nanoenterprises

The negative impact of COVID-19 to nanoenterprises is undeniable. The research shows that nanoenterprises are showing positive signs of bouncing back faster.

Preferential option to those at the bottom of the pyramid should be extended first since these groups can bounce back quickly; only need a small amount of stimulus; will reduce need for cash dole outs; and will reach millions of Filipino low income households.

Note:

The research is part of a series of rapid community assessments that determines the economic impact of COVID-19 to microenterprises and the informal sector. SEDPI, a microfinance institution (MFI), conducted the survey from June 23-30 with 5,791 respondents located in Agusan del Sur and Surigao del Sur.

It is not a representative sample of the entire Philippines. It is highly localized but should be a good case study that reflects the situation in the countryside. SEDPI believes that the nationwide experience may not be far from our research results.

Previous updates:

The titles are hyperlinked. Click on the titles to full read article online.

• June 12 (Update 9): Microenterprises show signs of bouncing back as lockdown eases
• May 28 (Update 8): 8 out of 10 microenterprises open for business one month after GCQ
• May 22 (Update 7): Demand for microenterprise products remain weak amid COVID pandemic
• May 15 (Update 6): Demand slumps on microenterprise products 2 weeks after GCQ
May 8 (Update 5): Only 5% of microenterprises back to “normal” in first week of GCQ
• April 30 (Update 4): Two in three microenterprises hopeful to bounce back two months after lockdow – UPDATE 4
• April 24 (Update 3): Community assessment and recommendations for support to microenterprises and the informal sector during and after COVID-19 – UPDATE 3
• April 14 (Update 2): Community assessment and recommendations for support to microenterprises and the informal sector during and after COVID-19 – UPDATE 2
• April 6 (Update 1): Community assessment and recommendations for support to microenterprises and the informal sector during and after COVID-19 – UPDATE 1
• March 30: Immediate impact of COVID-19 lockdown to microenterprises

The COVID-19 pandemic continues to pose serious threats to health and has already disrupted the economy. This prompted the government to enact Republic Act No. 11469 otherwise known as the “Bayanihan to Heal As One Act,” declaring a state of national emergency in order respond to the urgent needs of the people.

It is in response to this urgent need and call that the Ateneo-SEDPI Microfinance Capacity Building Program (Ateneo-SEDPI MCBP) recognizes our role in aiding government to promote and protect the interests of the Filipino people, especially low income groups, in these challenging times. For the past 14 years, Ateneo-SEDPI MCBP provided training, research and consulting services to more than 2,000 microfinance institutions in the Philippines with a combined outreach of 10 million low income households.

SEDPI invests in 15 cooperatives and microfinance NGOs nationwide. It also directly provides financial services to more than 8,000 low income households in Mindanao. SEDPI works in partnership with Pag-IBIG, Social Security System, Land Bank of the Philippines and Development Bank of the Philippines to bring social protection and welfare services closer to low income groups.

Remaining true to our vision and mission, we commit to do our moral and lawful duty to provide a “grace period” for the loans of our microfinance clients.

In Section 4 (aa) of RA 11469, the law directs:

“ . . . all banks, quasi-banks, financing companies, lending companies, and other financial institutions, public and private, including the Government Service Insurance System, Social Security System and Pag-IBIG Fund, to implement a minimum of a thirty (30)-day grace period for the payment of all loans, including but not limited to salary, personal, housing, and motor vehicle loans, as well as credit card payments, falling due within the period of the enhanced Community Quarantine without incurring interests, penalties, fees, or other charges. Persons with multiple loans shall likewise be given the minimum thirty (30)-day grace period for every loan . . . ”

However, we noticed an inconsistency with the implementing rules and regulation (IRR) of RA 11469. In Section 3.01 of the IRR of RA 11469 where “Mandatory Grace Period” was discussed, it states that:

“ . . All Covered Institutions shall implement a 30-day grace period for all loans with principal and/or interest falling due within the ECQ Period without incurring interest on interest, penalties, fees and other charges. The initial 30-day grace period shall automatically be extended if the ECQ period is extended by the President of the Republic of the Philippines pursuant to his emergency powers under the Bayanihan to Heal as One Act . . . [emphasis added]”

The text of RA 11469 clearly provides in Section 4 (aa) that all loans falling due within the period of the enhanced community quarantine shall not incur interests, penalties, fees, or other charges. This provision of the law was not adhered to by the IRR when it said that “ . . . All Covered Institutions shall implement a 30-day grace period for all loans with principal and/or interest falling due within the ECQ Period without incurring interest on interest, penalties, fees and other charges . . .” [emphasis added]

Prohibiting financial institutions to impose “interest on interest” is far different from prohibiting them to impose “interest” on loans. The IRR provides that financial institutions are only mandated to cancel the additional interest that may be imposed due to late payment of the loan. This is different from what the law really provides which mandates financial institutions to totally cancel the interest of the loan for the duration of the quarantine period.

Many of our clients who have loans (microcredit) with us used this to finance their livelihood. In a community assessment we conducted on March 31, 2020, 40% of our members completely stopped their lovelihoods and another 40% reported weakened livelihoods. We were not able to reach the remaining 20% because they live in places where cellphone signal could not reach them.

This is why we, in the microfinance industry, applaud RA 11469 for canceling the interest of loans during the duration of the quarantine. In fact, as early as March 15, 2020 we already declared a moratorium on loan repayments to our clients. This means that interest on these loans for the quarantine period will not be charged.

However, if the IRR will be implemented, only “interest on interest” will be canceled and not the whole “interest” of loans during the quarantine period. This will create a huge problem for MFIs since most access loans through commercial banks. If the IRR will be implemented, MFIs will still have to pay the interest on loans from commercial banks even if MFIs already canceled the interest on the loans of our clients.

With the current IRR, MFIs will bear the brunt of the cost of interest which may endanger their financial sustainability. There is also a good chance that this interest will be passed on eventually to microfinance clients who are already bearing the biggest impact of the pandemic.

With this, we strongly urge the concerned agencies of our government – Bangko Sentral ng Pilipinas, Department of Finance and Securities and Exchange Commission – to review the IRR of RA 11469. We would like to the IRR to follow the spirit of RA 11469. Hence, we call for the revision of Section 3.01 of the IRR of RA 11469 for it to remain true to the provision of Section 4 (aa) of RA 11469.

We hope that this matter will be resolved soon. The spirit and purpose of the Bayanihan to Heal as One Act must be genuinely upheld. We call for the government to completely prohibit interest charging on loans during the enhanced community quarantine.

It is our fervent hope that this crisis will be put to an end soon. MFIs will remain a partner of the Filipino people in securing their livelihood, health, and safety all throughout this challenging times until we are able stand up again as a strong and progressive nation.