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Quick Reactions on Press Articles about SME Financing

SME-lending-and-Banks

There were a number of articles in the press recently about SME financing.

On 23 October, it was reported that the value of SME loans grew at a slower pace ([1], [2]). In the article, a chief executive of a professional services company said the requirements for obtaining a loan from commercial banks are often troublesome and complex. The company was founded in 2002, recorded sales of S$5 million last year and now relies on investors for funding.

Mr Chan Chong Beng, President of the Association of Small and Medium Enterprises (ASME), soundly advised SMEs to spend time with bank executives to help them understand the nature of their business. (contrast however with this article here that lamented that “Banks lack skills to evaluate SME projects”). Bankers say that they are “open to lending to SMEs”, provided they can prove that they are creditworthy.

On the face of it, they all sound reasonable. But let’s not for a moment think that the two parties have a bargain on an even keel. Banks are clearly the MASTERS as they not only possess the absolute discretion on whether to turn on the tap on financing but also on how many pounds of flesh to extract. Scan around and you will find that despite the physical presence of competition, there really had not been much effect on pricing for SME loans over the years.

One measure of commercial banks’ profitability is their Net Interest Margins (NIMs), i.e., a measure of the difference between the interest income generated by banks and the amount of interest paid out to their lenders (for example, deposits), relative to the amount of their (interest-earning) assets.

The NIMs of our local banks are around 1.7%. Unsecured personal loans and SME loans are amongst the most lucrative loans for banks – margins are typically in excess of 10%! (see here for another example of banks’ unilateral pricing discretion)

Mr Lawrence Wong, a board member of the MAS, in his written reply in parliament says that:

“All the MAS expects is that banks and finance companies make prudent lending decisions, based on their own credit assessments and risk tolerance.”

Again a fair comment, but its effect entrenches the power of banks to pursue their vested interests. So I am not holding my breath on a change in attitudes anytime soon!

Capitalism, as we know it must evolve! How about alternative funding channels like…?