Forum: Personal guarantees help lenders make loans accessible to more SMEs

We thank Mr Danny Quah Wei Sheng for his feedback on the effectiveness of the Government's financial support schemes for small and medium-sized enterprises (SMEs) (Loans to SMEs: Impose conditions rather than seek personal guarantees, April 28).

Mr Quah asked if the interest rates on loans to SMEs should be closer to the 0.1 per cent rate at which the Monetary Authority of Singapore (MAS) lends to eligible financial institutions under the MAS Singapore Dollars (SGD) facility for Enterprise Singapore (ESG) loans.

Under this facility, the MAS lends SGD to banks and finance companies at an interest rate of 0.1 per cent a year, for two years, to support their lending to SMEs under the ESG loan schemes.

But this does not mean that the final lending rate to SMEs will be 0.1 per cent.

The price of an SME loan has a few components.

The first is the cost of funds to the lender; here, the MAS' low-cost funding works directly to reduce the price of the loan.

The second component is a credit spread to reflect the risk profile of the borrower; here, the Government's 90 per cent risk-share helps to reduce the credit spread, allowing for a lower final lending rate.

Then, there are costs incurred by the lenders in administering the loan.

The final lending rate is therefore higher than 0.1 per cent but much lower than it otherwise would have been, reflecting the combined impact of the measures by the Government and the MAS.

For example, under ESG's Temporary Bridging Loan Programme, borrowing costs have come down to around 2 per cent to 3 per cent on average, compared with other unsecured working capital loans to SMEs that typically exceed 6 per cent.

Mr Quah also questioned the need for personal guarantees.

The ESG loans are intended to support viable businesses experiencing temporary cash-flow difficulties. The participating lenders in the ESG loan schemes perform credit assessment and due diligence on borrowers. As the loans are generally not backed by collateral, the personal guarantees are a statement of the borrower's commitment to repay the loan. This helps the lender to make the loans accessible to more borrowers.

The Government is closely monitoring the effectiveness of the support measures implemented thus far and will continue to adjust the schemes as necessary, to ensure that our SMEs get sufficient support.

Jerome Lee
Director (Corporate Communications)
Monetary Authority of Singapore
Alethea Nah
Director (Corporate Communications)
Enterprise Singapore