MAS loosens reins on finance companies

The Monetary Authority of Singapore's proposed changes include relaxing limits on the ability of finance companies to offer unsecured loans.
The Monetary Authority of Singapore's proposed changes include relaxing limits on the ability of finance companies to offer unsecured loans. ST PHOTO: ARIFFIN JAMAR

New rules are on the way that will make it far easier for finance companies to lend more to businesses.

The proposed changes unveiled yesterday also include allowing the companies to offer more services and lifting a bar on foreign takeovers of such firms - a move that sent their share prices rocketing.

Taking some of the shackles off finance companies dovetails with last week's recommendations from the Committee on the Future Economy.

It urged in its report that more be done to support the capital-raising needs of start-ups and small and medium-sized enterprises.

These rule changes, which were announced by the Monetary Authority of Singapore yesterday, will affect the three licensed finance companies here - Hong Leong Finance, Singapura Finance and Sing Investments & Finance. All are listed on the Singapore Exchange.

The MAS said these firms fill a useful niche, complementing banks in providing funds to SMEs, but their role can be enhanced.

One change will involve relaxing limits on their ability to offer unsecured loans. A finance company can now only take on uncollateralised business loans that in total amount to 10 per cent of its capital funds. This will be raised to 25 per cent.

  • BOON FOR SMEs

  • To enhance finance firms' ability to lend to SMEs:

    • They will be allowed to offer current account and chequeing services to business customers.

    • They will be allowed to join electronic payment networks such as Inter-bank Giro.

    • Their limit on uncollateralised business loans to a single borrower will be raised to 0.5 per cent of capital funds, from the current $5,000.

A single borrower can now only take on uncollateralised business loan of up to $5,000 but the rule will be relaxed, allowing each borrower to get loans of up to 0.5 per cent of the finance company's capital funds. These new limits will be phased in, subject to the finance companies having sound risk management, the MAS said.

Singapura Finance chief executive Jamie Teo said these moves would allow finance companies to offer types of loans that were previously outlawed. "Project financing, for example, is uncollateralised. So, for example, if an SME has won the contract for a project but not enough funds to start on it, it can now come to us," he said.

The three finance companies here accounted for just under $7 billion of outstanding SME loans, both secured and unsecured, in the second quarter of last year, or about 8.5 per cent of the total in Singapore.

Finance companies will also be allowed to offer current account and chequeing services to businesses, and join electronic payment networks such as inter-bank Giro, Nets and Fast and Secure Transfers.

In another major step, the MAS will lift its prohibition on a foreign takeover of a finance company - but with conditions attached. It said it will consider an application for a merger or acquisition if SME financing will continue as a core business of the finance company.

The acquirer or merger partner must also "be able to demonstrate expertise in SME financing and present proposals to enhance the finance company's SME lending activities with new technologies, methodologies or business models", the MAS said.

To safeguard standards as these finance companies grow, the MAS will tighten risk management rules on finance companies, such as those on related party transactions and limits on exposures to the property sector.

Mr Dinuke Ranasinghe, the chief executive of start-up firm Arcadier, said having greater access to uncollateralised capital is a welcome alternative to the "traditional route" that young companies like his usually have to take to obtain capital, which is to sell equity.

"This isn't always the most palatable solution because company valuations are very conservative in Singapore, which means large amounts of equity may be given away for basic working capital," he noted.

A version of this article appeared in the print edition of The Straits Times on February 15, 2017, with the headline 'MAS loosens reins on finance companies'. Print Edition | Subscribe