The Straits Times Blogs - Francis Chan

Can the government help SMEs?

2009-02-08T10:03:00Z

Francis Chan on the sobering reality of SMEs' credit squeeze.

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.

Lower rates, looser loans?

2008-12-30T22:00:00Z

Francis Chan has his ear to the ground to feel the local SME mood.

WHEN the Government said last month that it would be providing $2.3 billion in loans to help ease the credit flow to local businesses during the economic downturn, many in the local SME community were sceptical.

Not of the Government’s intention to help but simply because these smaller firms - whose perennial problem has always centred on financing - know how difficult it is to apply for a bank loan.

First, they have to meet with a banker - some say, the smaller the firm, the younger the banker - who will ask for a business plan, collaterals and other details like financial statements and anticipated cashflows channels.

After a few weeks, they either get the good news that their application has been approved or they hit a deadlock and don’t get the funds they need.

Depending on the end result, the entrepreneur may have to repeat the application cycle again, and again, and again, and that was during the “good old days” where Singapore was seeing annual economic growth of over 7 per cent.

Today, with Singapore’s economy possibly growing even lower than the offical forecast of 2.5 per cent for the year, the issue of banks being adverse to lending remains to be the crux of the problem for some businesses gearing up for an even tougher year ahead.

Yesterday, the Government again stepped up its efforts to help local businesses deal with the impending credit squeeze - this time by lowering interest rates of government-backed loans, and increasing its share of insurance premiums for loans.

In its second annoucement in as many months on helping businesses mitigate cashflow issues, the Government said the latest enhancements are aimed at lowering the cost of credit for businesses as part of an overall package to address the financing needs of local firms.

This comes on the back of the $2.3 billion worth in loans which the Government said that it will pump into the credit system to help local firms tide through this slowdown.

For some of the loans, the Government even said it would bear up to 80 per cent of default risk to encourage financial institutions not to hold back on lending.

One has to wonder why the Government had to go to such an extent - not once but twice in two months - if financial institutions here are indeed still accepting and approving loan applications, and this despite financial institutions constantly rejecting the notion that they have been tightening up on loans.

When news of the Government’s enhancements to existing business financing schemes first broke last month, one of the more prominent leaders in the Singapore SME circle appealed to banks to take a more proactive stance to lending.
“The question is whether the financial institutions are now willing to loosen credit with these new measures. Certainly we hope that the banks will be more willing to consider loan applications and to process loans more quickly,” said Mr Lawrence Leow, president of the Association of Small and Medium Enterprises.

And yesterday, after Senior Minister of State for Trade and Industry S. Iswaran introduced the two new enhancements to the schemes, Mr Leow again made the same appeal.

“The announcement to reduce interest rates will help businesses lower their borrowing costs...but I think the issue now is whether it will stimulate banks into lending money to companies,” said Mr Leow yesterday.

For now, evidence that SMEs are having difficulties in attaining banks loans, with or without Government-backing, remain largely anecdotal.

However, those who spend enough time on the ground with these smaller firms say it is early days yet, as far as the impact of the credit crunch on businesses here is concerned.

“Most will still have existing credit lines and loans which they obtained before the onset of the crisis. And with order books typically consolidated during 2006 and 2007 still in play, it may be too early to determine the depth of the credit crisis which SMEs face at this point in time,” said a veteran entrepreneur who spoke to me on condition of anonymity.

“Just wait till the first or second quarter in 2009 - that will be the true test of a company’s resilience and a banker’s loyalty to his customer,” he added with a wryly smile.

Read Francis Chan's full story "Business borrowing made cheaper" here.

Up close with angry investors

2008-10-31T14:41:00Z

Francis Chan describes the atmosphere during the four DBS forums this week.

MORE than 700 customers of DBS Bank were in dialogue with the bank this week at Suntec City Convention Centre.

Okay, dialogue is probably too polite a word for it, from what I heard on the other side of the door, it sounded more like a slugfest, albeit coming from one direction.

The 700 are part of 2,400 customers of DBS who had invested over $170 million into credit linked notes sold by DBS called High Notes 2 and High Notes 5.

Investors of series 5 of the notes, who had accused DBS of misleading them into buying the complicated structured products linked to bankrupt US investment bank Lehman Brothers, demanded the meetings last week and amazingly got their way.

When I covered the event over Thursday and Friday, it was clear that investors of both series of products went to the forums with a mission.

In fact, a 300-strong action body called DBS Hi Notes Investor Group even got a handful of his members to attend the dialogues wearing red.

"It’s a show of solidarity with DBS," said one of its members, with a wink.

The group was highly organised, I learnt on Thursday. They told me that they had different people performing specific roles for the group such as "marketing communications", "logistics" and of course, "media relations".

Don’t believe me?

I just received a "Press Release" from the group last night. In it, was a professionally written report, detailing the group’s take on the forums and what it plans to do going forward.

But now back to the forum.

The media were not allowed in, naturally, but the echoes we hear through partitions hinted of emotionally charged investors "giving DBS a piece of my mind", as one investor told me.

Even the usually cool Rajan Raju, who heads the bank’s consumer banking business admitted after the first forum on Thursday, that there was a lot of anxiety with investors clamouring for a chance to take a shot at DBS.

When asked by a reporter for his take of the first dialogue session on Thursday, he coolly replied, "One, is that our customers are extremely emotional at this time."

But on the business end, Mr Raju, stuck to his guns, saying it was important that DBS kept to its "principals and process".

"As you can understand is not an easy task but that is something we have to continue to talk and discuss with our customers," he said.

And talk he did, and possibly even winning over some customers with his sincerity and courage under fire.

"I can tell the Rajan guy is a good guy, I can tell he wants to help," said one investor, a retiree in his 60s who invested $25,000 in High Notes 2. He was attending yesterday’s session.

"But too bad, ultimately, its the top guys above him that will decide our fate," he said, as he waved me goodbye, brushing away my chance to pull out my voice recorder.

Much has been said about the debacle; not all were easy on the ears of either DBS or the investors.

Even reporters and news photographers have taken a hit by angry investors seething from the impotence of the forum, or their efforts to bully a refund from DBS.

Most were not in the mood to share their stories. Those that did are sometimes grateful for just another listening ear.

High Notes 5 was unwound after Lehman crashed on Sep 15 and unsuspecting investors were told then, that their investments may be wiped out.

This week, those same investors found out that their investment in High Notes 5 were worthless.

As for High Notes 2, it still has some value, but it is hovering dangerously around 16 per cent and investors fear they may end up like the folks who bought High Notes 5, with nothing.

So two days and four forums later - many the investors still did not receive the "blanket" compensation they desperately expected.

Many, who also demanded an expression of guilt from DBS for allegedly misleading them into buying what they believe was a dodgy product from the start, also went home empty.

Surprised? Ask me again next week.