New and existing loans will benefit from the cheaper rates - they have been cut by 1.25 percentage points - which kick in from tomorrow.

The Government also announced yesterday that it will increase its share of insurance premiums for loans, which will also cut costs for businesses.

Yesterday's steps follow feedback that a government initiative introduced last month to get money flowing to businesses has hit a brick wall in the form of banks reluctant to lend.

The Senior Minister of State for Trade and Industry, Mr S. Iswaran, said the Government has been monitoring the situation and is making improvements to existing loan schemes.

He said: 'The enhancements...aim to lower the cost of credit as part of the overall package to address the financing needs of the business community.'

Business leaders broadly welcomed the moves but want the Government to lean more heavily on the banks to get them lending again.

Mr Lawrence Leow, president of the Association of Small and Medium Enterprises (Asme), said: '[Reducing] 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.'

An entrepreneur who asked not to be named told The Straits Times: 'I think the Government should talk to [the banks] instead, because they are the ones holding back on us.

'Although my bank has not pulled back on my credit line, I can see that some of my suppliers and clients are already feeling the squeeze.'

The new measures have cut interest rates for key business financing schemes such as the Micro Loans, Bridging Loans and Local Enterprise Finance Scheme by 1.25 percentage points.

Rates for loan tenures of up to four years will be reduced from 6.25 to 5 per cent while those for above four years will fall from 6.75 to to 5.5 per cent.

'The important thing about this is that we are making these changes not just to new loans but to existing loans for the tenure of the loans,' said Mr Iswaran.

'So companies already on the scheme - at least 13,500 of them - will be eligible to benefit from this lower interest rate for the remaining tenure of the loans.'

The Government is also lifting its share of premiums under the Loan Insurance Scheme from 50 to 90 per cent.

Businesses now pay an insurance premium of 1.5 per cent of the loan quantum but from tomorrow, they need pay only 0.15 per cent, with the Government shouldering the rest.

The Government first tackled the credit squeeze last month, announcing that it would provide an extra $2.3 billion worth in loans to help all local businesses.

A central initiative was that it would take on a greater part of the risk of some existing financing schemes - in some cases bearing up to 80 per cent - to encourage financial institutions to keep lending.

But some businesses have complained that the banks are not doing their bit and have remained tight-fisted with loans for firms gearing up for a tough year ahead.

But Mr Iswaran yesterday pointed to Monetary Authority of Singapore data that shows 'active loan generation'.

However, he said that banks were understandably more 'risk adverse' in the current environment.

'It is not business as usual,' said Mr Iswaran. 'So [business owners] need to demonstrate where their cashflow is coming from, how is the business being modified, as part of the case for the new loans they are applying for.'

Two SME owners who recently applied for the enhanced financing schemes agreed with the minister.

'I think you must be as transparent as possible during times like these so that your bankers and the Government can help you,' said Mr Tan Yew Kiat, founder of fashion firm Bysi, which has secured a $500,000 bridging loan.

Mr Michael Tien, chief executive of Atlas Sound & Vision, said that if a firm can show that it is managed well and within costs, banks will be more willing to lend.

'To be fair, the banks must ensure that the SME is viable...if the SME defaults, who is going to help the bank?' said Mr Tien, who is hopeful that his bank will approve his $500,000 loan application under the enhanced government financing schemes.

franchan@sph.com.sg

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