Near-zero rate helps banks reduce cost of loans to SMEs

Move by MAS, ESG benefits SMEs that seek to take out govt-assisted loans to tide over Covid-19 crisis


Small and medium-sized enterprises (SMEs) that want to take out government-assisted loans to ride out the Covid-19 crisis will benefit from a government initiative that allows banks to borrow at near-zero interest rate.

The Monetary Authority of Singapore (MAS) and Enterprise Singapore (ESG) said in a statement yesterday that eligible banks can borrow at just 0.1 per cent per annum for a two-year tenor, in a move to support SME lending.

The initiative will help lower the cost of loans for the Enhanced Enterprise Financing Scheme - SME Working Capital Loan and the Temporary Bridging Loan Programme, the statement added. The lower borrowing cost will apply to such loans taken between April 8 and March 31 next year.

The Straits Times understands that no funding cap has been imposed on the initiative yet.

The Temporary Bridging Loan Programme is aimed at helping local companies manage their immediate cash flow needs.

Companies that require more working capital beyond the programme can apply for the Enhanced Enterprise Financing Scheme - SME Working Capital Loan.

MAS and ESG noted that financial institutions typically take into account their costs of funds and underwriting and a credit spread to reflect the risk profile of the borrower when they price SME loans.

"By providing financial institutions funding at the low interest rate... the facility reduces the financial institutions' cost of funds for loans made under the ESG Loan Schemes," the statement said.

"This will help SMEs manage their cash flow better amid the current Covid-19 pandemic."

The latest initiative, which will be in place until April next year, was first announced when MAS rolled out baseline measures for banks and financial institutions to support companies during the pandemic.

OCBC Bank global commercial banking head Linus Goh said the bank can lower its interest rates on government-assisted loans with the facility to between 2 per cent and 3 per cent, down from 6 per cent or more at the beginning of the year.

"We will pass all the cost savings to the SMEs and have also waived our processing fees for the new loans," he added.

Deputy Prime Minister and Finance Minister Heng Swee Keat said in Parliament on April 6 that the Government will increase its risk share of loans to 90 per cent, up from 80 per cent.

MAS and ESG said this initiative aims to complement the Government's efforts.

"The facility also reinforces MAS efforts to ensure ample Singdollar funding to banks in Singapore, by maintaining a high level of Singdollar liquidity in the banking system, so that they can continue to play their role in providing credit to individuals and businesses in Singapore," the statement said.

MAS managing director Ravi Menon said: "With the Government sharing 90 per cent of the risk on (the ESG) loans and MAS providing funding at almost zero cost under the facility, banks and finance companies will be able to make more loans to SMEs and at lower cost - in fact, we expect them to do so.

"Together with the various relief measures that banks and finance companies are providing SMEs as part of the package announced by MAS (last month), this latest initiative will help provide strong support to our SMEs, which are a vital part of our economy."

ESG chief executive Png Cheong Boon said: "We hope financial institutions would be able to extend loans... at lower interest rates to more SMEs, thereby helping them to ease their cash flows, sustain their operations and retain their workers during this difficult period."

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A version of this article appeared in the print edition of The Straits Times on April 21, 2020, with the headline Near-zero rate helps banks reduce cost of loans to SMEs. Subscribe