THE reality of the credit squeeze for small and medium enterprises (SME) is rather clear: Let's start with the numbers.

Domestic lending fell again last month, this time by $1 billion or 0.4 per cent to $272.1 billion compared to November 2008 – the second consecutive month it has fallen.

Latest data from the Monetary Authority of Singapore (MAS) showed that business lending dipped from $159.6 billion in November to $157.8 billion last month.

This was attributed to the fact that banks have tightened credit standards while businesses and individuals have cut back on borrowing.

And while overall Singapore bank loans grew by some 17 per cent or $38.8 billion last year - peaking in October - signs still point to drastic cuts in lending from November as the recession kicked in.

The decline was said to be exacerbated by reduced lending to businesses, which fell $5.4 billion in two consecutive months.

And while the data from MAS does not actually indicate a credit freeze, there remains other tell-tale signs that lenders are indeed becoming more cautious and risk averse.

Talk to any businessman today and he will likely tell you that while they appreciate the Government's efforts in trying to spur lending to businesses, they are are still feeling the squeeze from banks.

They say one of their biggest worries these days, among the many other headaches they have as businessmen, is that telephone call from bankers informing them that their credit lines are being reduced, or worse, pulled completely.

Of course, many have already received such calls from their bankers over the last few months. In fact, a good number of SMEs were complaining about such moves by banks as early as the third quarter of last year.

Banks and finance companies that used to court these same SMEs during boom time have been receiving a lot of flak for their "sudden" risk aversion. It probably also did not help that many bankers were featured in the news saying rumours of them cutting back on credit for firms were simply not true.

Bankers defended their positions, explaining that most of the rejected loan applications were mainly from new customers – those who do not have an initial relationship with the bank – and so the banks do not know them enough to go on a limb for them.

SMEs in turn argue that it is precisely because their existing lines were cut by their bank, that they have to go in search of new bankers.

The timing cannot be any worse as far as smaller firms are concerned. Even without the crisis, financing was already a perennial bugbear for SMEs. And now with the downturn undoubtedly causing a sharp fall in corporate and consumer spending - Singapore’s economy also got hit hardest in the last quarter.

The Government has since forecast a 5 per cent contraction for 2009 as the global slowdown in consumption threatens our city-state, which invariably is highly dependent on exports.

This will hurt our SMEs, of which a majority are in secondary industries, playing supporting roles to larger multinational firms based here.

So with business prospects slowing, banks would naturally hold back on funding businesses which they determined – through their own credit rating system – are of high risk.

Throw in the global credit crunch, tumbling banking behemoths around the world, and the widespread paranoia eating into inter-bank lending relationships, and what you will get is an increasing epidemic of risk aversion among lenders.

The Government first tackled the credit squeeze in November, announcing that it would provide an extra $2.3 billion worth in loans to help not just SMEs but all local businesses.

To mitigate the issue of banks being reluctant to lend, the Government stepped in and offered to increase their share of loan default risk for some of the financing scheme it backs - some loans even see the Government bearing up to 80 per cent of default risk.

The move to take on more risk in such schemes is a tried and tested solution which was implemented during the last major downturn in 2001.

Back then, the risk percentage between the Government and the participating financial institution for some loans started at 50-50.

It was bumped up to 70-30 in August that same year, with the Government bearing the higher risk. That proportion went up again to 80-20 later in 2001 and stayed that way until December 2004.

And just before this new year, interest rates were also slashed on Government-backed business loans to help cut borrowing costs.

Senior Minister of State for Trade and Industry, Mr S. Iswaran told the business community at the time that both new and existing loans will benefit from the cheaper rates – they have been cut by 1.25 percentage points.

Mr Iswaran also announced then that it will increase its share of insurance premiums for loans, which will also cut costs for businesses.

The Government is counting on all the measures it has announced since late last year to address the near-term credit financing issues but it hinted that if the situation deteriorates further, more resources will still be assigned.

But during last week’s Budget debates, Members of Parliament (MP) warned that SMEs which need bank loans to ease cashflow say they still face dauntingly high interest rates which cannot be bargained down much - if they get the loans to begin with.

MPs related story after story of despondent bosses still finding it hard to get loans, despite recent measures by the Government to encourage bank lending.

And this, after Finance Minister Tharman Shanmugaratnam introduced, among other measures, a Special Risk-Sharing Initiative (SRI) during Budget 2009, where the Government would take on more of the risk in bridging loans and trade financing.

Nominated MP Loo Choon Yong, who is also executive chairman of Raffles Medical Group noted that with the Government underwriting 80 per cent of the risks for SRI loans, the risk-reward ratio is now five times for the banks.

"It sounds like our local banks should be rushing to extend credit to our businesses on such terms," said Dr Loo.

"But to date, the business community is still lamenting the poor credit availability and that banks are still not keen to lend...They cannot possibly all be unworthy borrowers."

There are others, however, who believe that its time to quit the banks and get the Government to disburse the loans directly instead of using banks to administer the schemes.

"Maybe the government could set up an interim 'financial agency' for Singapore companies – the government could outsource the credit assessment and application processing to any of the banks but make the final lending decisions," said a reader who wrote to The Straits Times.

"The financial cost of such an agency to the government would be no more onerous than that of the existing SRI," said Mr Ee Teck Siew.

Dr Loo, agreed. In Parliament last week, he too floated the idea for the Government to set up a new financial institution to offer loans to companies shut out by banks.

He explained that with a clean balance sheet, it might be easier for this new institution to offer financing to firms and it could also circumvent "structural and institutional obstacles" and stimulate banks to lend.

The Government's stand on this was clear right from the start. It will not take on that role, for now.

But some good news did come about last week amidst the doom and gloom as DP Information Group released the rankings of Singapore-based companies.

More than 8,000 locally incorporated firms – large and small – were assessed according to sales, net profit and return on equity for the 2009 Singapore 1000 and SME 500 rankings.

The period from June 2007 to May last year was examined by DP Info and Ernst & Young.

They found that SME 500 companies recorded a 6.7 per cent rise in sales to $14.9 billion last year, while S1000 firms, recorded an increase of 21.6 per cent, from $1.3 trillion to $1.6 trillion.

Although the results were based on pre-crisis audited financial data, Minister of State for Trade and Industry Lee Yi Shyan told corporate bigwigs last Friday that it still underlined the fact that the corporate sector was robust going into the downturn. And the record sales and profits last year, backed by low short-term debt and strong credit standings, mean firms remain in good shape to tackle the challenges ahead.

Mr Lee's optimism seemed to have rubbed off on some SME bosses.

During my chats with businessmen last week, most are saying that they do see the credit situation improving after the Government stepped in.

SME 500 award winners like Nam Leong, a leading supplier of carbon steel pipes says they are hopeful about 2009.

"We're heading into a very challenging business environment but thankfully our exposure is in the construction and shipping sector which is still doing okay," said Nam Leong executive director, Mr Colin Tan.

"And with the Government coming in to share 80 per cent of the risk on some bank loans - banks are now more willing to listen - so I think 2009 may still be smooth sailing."

For all our sakes, I sure hope Colin is right.