A leg up for SMEs in the financing stakes

Tweaking finance firms' rules to boost SME lending may work wonders for banks too

The only issue that seemed to concern the stock market over a recent freeing up of rules regulating finance firms is the possibility that the affected companies may now become lucrative takeover targets.

In the share price run-up following the announcement, Hong Leong Finance surged by as much as 21 per cent in price, while the other two much smaller listed finance companies - Sing Investments & Finance and Singapura Finance - jumped by up to 25 per cent and 35 per cent, respectively.

Still, despite the euphoria over their share prices, it would be a pity if the only interest kindled in relation to finance companies was how soon they can get swallowed up by, say, a foreign rival keen to expand into the Singapore financial market.

The Monetary Authority of Singapore, their regulator, has made it clear that any new partner or acquirer must make a commitment to maintain financing to small and medium-sized enterprises (SMEs) as a core business, and be able to grow the business with new technologies or business models.

Such requirements may whittle down the number of possible suitors interested in taking over a finance company here.

As such, it may be the other changes that prove to be transformational for finance companies. These include allowing them to provide bigger unsecured loans, currently capped at $5,000 for each customer, as well as the ability to offer current accounts and cheque services to their clients.

The changes may prove to be a boon for SME bosses, letting them borrow on a project basis if they have few assets to offer as collateral. And if more SMEs can operate on such an asset-light model which frees up capital, otherwise trapped in an illiquid asset such as a property, for business expansion, that will truly be a game-changer.

Before discussing these changes further, it is useful to look back at the role played by finance companies in the development of Singapore's economy. These companies used to be a significant part of the financial landscape, with as many as 35 of them operating all over the island as recently as the late 1980s. Quite a number of them were even listed on the stock market. The bulk of their customers were SMEs.

A few were set up by businessmen with SME pedigrees. The biggest of all, Hong Leong Finance, was established in 1966 by the late founder of the Hong Leong group, Mr Kwek Hong Png, who started the business from a small shop in Beach Road. These firms generally carry out secured lending which gives them some collateral to fall back on if their loans turn sour. And since some of their collateral may come in the form of an illiquid asset such as a property which cannot easily be sold, they also hold plenty of cash to reassure customers that their deposits are safe with them.

The first wave of consolidation among finance firms started in 1994, when the Government required them to raise their shareholders' funds from a mere $500,000 to a hefty $50 million within the next eight years. This caused some of the smaller ones to close shop.

The second wave of consolidation came as we crossed into the new millennium, when banks started to press aggressively into areas such as home mortgages and car loans - the traditional mainstay of a finance firm's business. As they did so, it made sense for local lenders with separate finance company subsidiaries to fold such businesses into their operations in order to avoid duplication and cut costs.

But the big losers from these rounds of consolidation were SMEs, which used to enjoy personalised service from finance companies, and which now find they are too small to get any meaningful attention from the banks to which they turn for their financing needs.

As Mr Ian MacDonald, Hong Leong Finance's former president, used to stress, when it comes to servicing SMEs, it is good old-fashioned interaction that is key to a successful relationship - understanding what sort of financing needs they require, rather than have them going to some website and ticking a few boxes in hopes of getting a loan.

One problem SME bosses have with relationship managers employed by the banks is that some of them are so fresh to the job that they have had to be educated on the finer points of the businesses they are dealing with. Worse, in good times, the turnover among managers may be so high that even before a meaningful relationship could be struck with them, they would have already jumped ship for another better-paying job.

And in bad times, the worry among SMEs is that as the relationship established with the bank does not go particularly deep, the bank may pull the credit line just as they are facing problems with suppliers shortening credit terms or even insisting on cash payments, while customers cancel orders, take longer to pay up or even default on payments.

Then there is the grouse among younger SMEs over difficulties in getting banks to approve their loan applications, given the need to do extensive checks on their credit records, margins, assets and so forth. That is why the relaxation of some business restrictions on the three remaining finance companies may turn out to be a big game-changer, especially for SMEs which believe their needs are not taken care of properly by the banks.

Take the move to raise unsecured loans to a single borrower from the current $5,000 to 0.5 per cent of a finance company's capital funds. Coupled with another move to raise the limits on a finance company's total unsecured loans to 25 per cent of its capital funds, this will allow the three finance companies to extend up to $550 million in unsecured loans to their SME customers.

At first glance, this does not seem like a big sum. Hong Leong Finance's net loan assets alone amount to $9.51 billion.

But the tweaks, accompanied by other changes such as allowing finance companies to offer current accounts and cheque services, will enable them to help their SME customers manage their business cash flow and offer them unsecured credit facilities.

That may not sound like a big deal but it goes back to basic business principles that in order to serve clients better, you must understand how they operate - and for finance companies, that means getting a better understanding of their SME clients' cash flow.

For SMEs, one of the easiest ways to get loans has always been to use their shophouses or factories as collateral. But the changes may prove a boon for SME bosses, letting them borrow on a project basis if they have few assets to offer as collateral. And if more SMEs can operate on such an asset-light model which frees up capital, otherwise trapped in an illiquid asset such as a property, for business expansion, that will truly be a game-changer.

As Hong Leong Finance is the biggest finance firm by far in terms of asset size and reach, it stands to benefit most from the changes. That also ironically makes it the most attractive takeover target for any player wanting to enter the market.

But given the important role the firm has played in SME financing over the years, it would be a pity if it should ever become subsumed into a bigger financial group.

The 190,000 SMEs here make up the bulk of businesses in Singapore and employ about two-thirds of the workforce. Tweaking the rules on finance companies offers SMEs more choices in getting much-needed finance. It may also spur the banks to step up efforts to serve SMEs better.

For finance companies, the changes mean a new lease of life, after being viewed as anachronisms - out of touch with the times.

 Goh Eng Yeow

A version of this article appeared in the print edition of The Straits Times on February 27, 2017, with the headline 'A leg up for SMEs in the financing stakes'. Subscribe