Government a Lender of FIRST Resort? Room for P2P Lending?

Government Assistance to SMEs

Truth be told, the Singapore government has been rather responsive and pro-active to the SME sector, especially in the area of financing. During the crisis in 2009, the Special Risk Sharing (SRI) initiative was introduced to make available S$5.8 billion of public funds to stimulate bank lending by increasing the government’s proportion of risk-sharing to 80% for SME loans. [link] Post crisis, the SRI has since been watered down and the government’s co-share of risks with the banks for SME loans is adjusted back to 50%.

Government assistance, mainly Loan Insurance Scheme (LIS) and LIS+, Local Enterprise Finance Scheme (LEFS) and Micro Loan Programme (MLP) are administered via participating financial institutions (PFIs). More details can be found at SPRING’s website.

Government outsources function of credit assessment

The government outsources the function of credit assessment, relying on PFIs to approve or reject a loan. When a PFI approves such application, the government sponsors the loan by co-sharing 50% of the default risks together with the PFIs.

SMEs complained for many years

For many years, SMEs have complained about facing challenges in financing. The annual DP SME surveys are a great resource to understand the SME landscape. In its 2006 survey, SMEs had highlighted challenges in accessing bank financing and cited unattractive loan terms that they were getting from banks.

So, bank financing for SMEs had not been forthcoming for awhile! This was also discussed in my earlier post “Serving the UNKINDEST CUT to SMEs”.

Reliance on government funding

I felt it was proactive of the government to design initiatives to address the inability of the private financial sector to fulfill the needs of SMEs.

And they have been rather successful! By the 2011 survey, it was reported that 50% of
their respondent SMEs relied on government funds for their financing needs!

Recently, thanks to a query from NCMP Yee Jen Jong, we learnt from Minister for Trade and Industry, Lim Hng Khiang that:

The total value of loans
approved under MLP in 2010, 2011 and 2012 were S$144.1 million, S$94.6 million and S$120.7 million respectively, with the corresponding median interest rates being 5.5 per cent, 5.5 per cent and 5.75 per cent.

******

The total value of loans approved under LIS and LIS+ in 2010, 2011 and 2012 were S$2.3 billion, S$1.6 billion and S$1.3 billion respectively, and the average annual turnover of successful applicant companies is around S$15 million.

Rolling out big public MOOLAHs for sure!

An inadequate financial sector for SMEs

In an earlier post, I alluded to the “collateral damage on SMEs” with the new Basel III standards. In this year’s SME Committee Recommendations for Budget 2013 by the Singapore Business Federation, the committee further reinforced that PFIs with their profit driven motives are still wary of SME default risks in spite of the government co-sharing half the risks! [link] Think of it, it’s actually GREAT business from the banks’ risk-reward perspective, because they earn ALL the returns by bearing only HALF the risks (ok, it’s not exactly that simple but you get the drift…).

Consider also the analysis made in a previous post that SMEs garnered less than 8% share of non-bank loans and less than 3% of the system’s total loan book, it is CLEAR that the existing financial sector is INADEQUATE (structurally or otherwise) for SMEs.

Lender of First Resort?

So, enter the government and her success story…

But it now SCARES me that the government is becoming a Lender of First Resort!

I would rather, given the many competing constituent demands for public funds today, that funds be better channeled to areas in education, healthcare and housing, so that the government can stick to what the electorate chose them to do in the first place, which is GOVERNANCE.

If only alternative solutions exist to alleviate the SME financing problem…

Why not p2p lending as an alternative if banks can’t do the job?

Elsewhere in the world, particularly in the U.K., p2p lending has emerged as a viable alternative to address the structural problem of under-served SMEs and investors in the traditional financial system.

Shouldn’t p2p lending be at least given a trial to bridge the financing gaps for SMEs and at the same time, avail a new asset category for investors to access?

To me, this beats having the government as Lender of First Resort!