January 2, 2026 l The Manila Times
Mandatory small and medium enterprise (SME) lending quotas and risk-based loans are often seen as incompatible. One tells banks to increase exposure, regardless of conditions. The other insists that credit be extended only when risk is properly assessed, priced and managed. At face value, the tension is obvious.
But this conflict can be reconciled — if mandated credit programs are redesigned not as rigid volume targets, but as capability-based access mandates supported by modern credit-risk tools. Properly structured, quotas can strengthen, rather than undermine, prudent lending.
The problem with traditional SME credit mandates lies in their design. Fixed portfolio targets — such as requiring a certain percentage of total loans to go to micro, small and medium enterprises — implicitly assume that all banks face the same market conditions, possess the same capabilities and serve similar borrowers. They also force lending even when pipelines are weak, data is thin or risk is poorly understood. Unsurprisingly, banks respond by gaming the system, paying penalties or booking low-quality credits that later turn out to be nonperforming.
A more effective approach is to shift from pure volume targets to access-oriented metrics. Instead of asking how much banks lend to SMEs, regulators should ask whether banks have created safe, repeatable channels through which SMEs can access finance.
International experience shows that measuring access — first-time borrowers served, credit approvals through cash-flow models, use of guarantees or onboarding through digital platforms — better aligns development goals with risk discipline.
If mandates are retained, they must also become category-sensitive. A one-size-fits-all quota distorts incentives. Large universal banks are better positioned to serve medium enterprises using structured finance, cash-flow lending and guarantee programs. Rural and thrift banks have comparative advantage in micro and small enterprises, where relationship lending and local knowledge matter most.
Digital banks and fintech-linked institutions excel at alternative data, automated underwriting and low-cost onboarding. Differentiated mandates, aligned with each bank’s operating model and risk appetite, reduce distortions while expanding overall SME access.
Crucially, regulators should allow risk-mitigating tools to count as meaningful compliance. SME lending becomes safer when banks are encouraged — not penalized — for using credit guarantees, movable collateral registries, cash-flow-based underwriting, alternative data scoring and portfolio risk-sharing facilities. Loans originated under these frameworks should qualify more favorably toward any mandate. Doing so turns quotas into a lever for modernizing SME finance, rather than a constraint that pushes banks toward outdated practices.
The incentive structure also matters. Flat penalties for noncompliance often fail because banks rationally choose to pay them rather than invest in SME lending capability. Penalties should be proportionate to bank size and systemic footprint, ensuring they are not treated as a cost of doing business.
At the same time, positive incentives matter. Lower capital charges for guaranteed SME loans, reduced reserve requirements for high-quality SME portfolios, or preferential access to rediscounting facilities can encourage compliance without diluting prudential standards.
Safe-pipeline approach
Another useful mechanism is a “safe pipeline” approach. If a bank cannot generate SME loans safely under risk-based principles, it should be allowed to channel its shortfall into alternative development pathways — such as funding guarantee pools, contributing to SME development facilities, or investing in qualified SME bonds or securitizations. This preserves the development intent while ensuring that credit risk is borne by institutions best equipped to manage it.
Data
None of this works without strong data. Risk-based lending thrives on information, and quotas fail without transparency. A reconciled framework requires standardized SME reporting, clear distinctions between direct lending and alternative compliance, robust performance dashboards for regulators and policymakers, and borrower-level data sharing through credit bureaus. Good data allows both mandates and market discipline to function.
Finally, mandates should be treated as transitional tools, not permanent fixtures. Countries with long histories of credit quotas have gradually reduced reliance on blunt mandates while strengthening guarantees, refinance facilities and risk-based incentives — particularly for first-time SME borrowers. The Philippines can follow a similar path.
In the end, the goals are not contradictory. Quotas seek broader access to credit for underserved enterprises. Risk-based lending seeks safety, sustainability and discipline. The reconciliation lies in shifting from hard volume mandates to capability-based access requirements — supported by guarantees, proportionate incentives, differentiated targets and modern risk tools.
That is not a retreat from prudence. It is what a maturing financial system should aspire to: banks that are not forced to lend unsafely but are required to build the capacity to lend safely to the SMEs that drive inclusive growth.
***The views expressed herein are his own and do not necessarily reflect the opinion of his office as well as FINEX. For comments, email benel_dba@yahoo.com. Photo is from Pinterest.