MAS' near-zero cost funding to banks will halve borrowing rates for SMEs

Singapore

SINGAPORE banks will just about halve the interest rates to small- and medium-sized enterprises (SMEs) on the latest tranches of government-assisted loans, as the central bank stepped in for the first time ever to directly offer funding at near-zero cost to financial institutions amid the virus outbreak.

The Monetary Authority of Singapore (MAS) will lend Singdollars at an interest rate of 0.1 per cent per annum to eligible financial institutions, which will in turn offer loans to SMEs at low cost.

The low-cost funding will be provided under the schemes from Enterprise Singapore (ESG), MAS and ESG said in a statement on Monday. With the low-cost facility to be tapped based on SMEs' funding demands, no cap has been set on its size.

Banks are saying that more demand for such relief from cash-strapped SMEs is expected, as the novel coronavirus continues to roil global economies.

The low-cost funding from MAS is available for a two-year tenor, though loans through the ESG schemes have a maximum repayment period of five years.

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These ESG loan schemes comprise the enhanced enterprise financing scheme, namely the SME working capital loan and the temporary bridging loan programme. These were made available beginning April 8, 2020 and will continue to be offered through to March 31, 2021. The government, through these schemes, increased its share of the risk embedded in these loans to 90 per cent. The low-cost MAS facility will be available to banks throughout the entire period that these ESG programmes are available.

In a statement, Ravi Menon, managing director of MAS, said: "With the government sharing 90 per cent of the risk on such 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...this latest initiative will help provide strong support to our SMEs, which are a vital part of our economy."

It is understood that banks will be closely monitored by the regulator to ensure that such low-cost funds are not used to load predatory pricing on borrowers stretched by the crisis.

In a media statement, Kurt Wee, president of the Association of Small & Medium Enterprises (ASME), said a survey about two weeks ago on a network of companies on borrowing rates showed that interest rates of 2 per cent to 3 per cent are "rare and unheard of for most SMEs in Singapore".

Government support through these ESG loan schemes had been raised in the Solidarity Budget, with the latest enhanced schemes open for application since April 8.

In passing on in full the cost savings from MAS' facility to customers, all three local banks said the interest rate of the government-assisted temporary bridging loan will fall to the range of 2 per cent to 3 per cent.

As it is, with the enhancements to the ESG scheme made available prior to this latest relief, the rate was already revised down to 3 per cent to 4 per cent, OCBC disclosed. At the start of the year, the rate was 6 per cent.

In pricing SME loans, financial institutions typically take into account their cost of funds, their cost of underwriting, and a credit spread to reflect the risk profile of the borrower. The SME segment is not homogeneous.

BT understands that customers which secured government-assisted loans at slightly higher rates from April 8 and before this low-cost scheme was made available, should be offered the lowest possible borrowing cost, with this MAS facility.

Banks have committed to loan approvals in a matter of days, quick disbursement of funds, and have waived processing fees for loan applications. They have also been disclosing more on accelerating demands for debt moratoriums and access to cheaper credit.

Founder of Nam Soon Timber Lee Tuck Keong said the company got approval from OCBC for a temporary bridging loan in less than a week. An events company, Radius, also successfully secured a S$1 million temporary bridging loan from UOB, with the money disbursed in about five days after the loan application was made.

CEO of ESG Png Cheong Boon said the latest relief should help SMEs to "ease their cash flows, sustain their operations and retain their workers during this difficult period".

OCBC's head of global commercial banking Linus Goh said the latest move by MAS is a "timely boost" to help SMEs in the escalating financial hardship, especially small businesses. OCBC expects the amount of government-assisted loans it lends out to small businesses to hit S$1 billion by June 30. This would also exceed the total government-assisted loans disbursed to the same customer segment during the 2008-2009 global financial crisis.

OCBC registered a spike in the volume of applications for relief measures in the last two months of more than 10 times. Close to 1,000 small businesses have also asked for deferment of principal payments on unsecured and secured SME loans.

UOB, which in February allocated S$3 billion in relief assistance to SMEs, saw a significant increase in the number of loan applications for the SME working capital loan and temporary bridging loan schemes. Approvals grew close to 60 times compared with the same period last year.

"We expect this demand to continue and remain committed to helping our customers see through to better times," said UOB head of group commercial banking Eric Tham.

"The facility, coupled with ESG's higher risk-share for their loan schemes, will support us in providing more SMEs, including those that may have previously been ineligible, with essential financing support."

DBS said it has already approved more than 1,200 loans worth more than S$1 billion under the government-assisted loans programme. In March, DBS disbursed twice the number of loans and total loan quantum for government-assisted SME loans, such as the SME working capital loan, compared with a year ago.

"We expect this momentum to continue at least into the fourth quarter of the year when the demand for goods and services is expected to pick up again. However, this will depend on the stabilisation of the Covid-19 situation in Singapore and the region," said DBS group head of SME banking Joyce Tee.

The temporary bridging loan programme (TBLP) is intended to help local enterprises manage their immediate cash flow needs. SMEs that require additional working capital beyond the temporary bridging loan programme can tap on the SME working capital loan (EFS-WCL).

Under the TBLP, eligible enterprises could from April 8 borrow up to S$5 million. The EFS-WCL was also enhanced, such that the maximum loan quantum was raised from S$300,000 to S$1 million, on top of the risk-share portion by the government being increased to 90 per cent, starting April 8.

From April 6, SMEs could as well opt to defer principal payments on their secured term loans up to Dec 31, 2020, subject to banks' and finance companies' assessment of the quality of the SMEs' security. SMEs have also been able to extend the tenure of their loans by up to the corresponding principal deferment period.

MAS had estimated that more than S$40 billion of existing loan facilities to SMEs would likely qualify for this opt-in relief scheme. This relief was made available to SMEs, so long as they did not have loans more than 90 days past due as at April 6.

READ MORE: Singapore banks to offer more affordable financial support to cash-strapped SMEs