MAS to directly lend to banks at near-zero cost, pumping cheap credit to SMEs

IN AN unprecedented move, the Monetary Authority of Singapore (MAS) will directly step in to lend Singdollars at an interest rate of 0.1 per cent per annum to eligible financial institutions, which will in turn offer loans priced off near-zero funding cost to small and medium-sized enterprises (SMEs).

The low-cost funding - to be offered in loans with a two-year tenor - will be provided under the schemes from Enterprise Singapore (ESG), in an aim to help financial institutions to make loans to SME borrowers more affordable, MAS and ESG said in a statement on Monday.

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 latest MAS facility complements the ESG loan schemes, which had also been enhanced as part of the Solidarity Budget 2020. The low-cost facility will be available to banks from now through to April 2021, with MAS not setting a cap on the amount to be disbursed through the facility.

It is understood that MAS lends strictly to match what SME borrowers are seeking from banks at near-zero funding, with the low-cost funds to be disbursed monthly to the banks.

With this scheme, Singapore's banking trio will lower lending rates for government-assisted SMEs loans to about 2-3 per cent.

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OCBC on Monday separately said it expects the amount of government-assisted loans it lends out to small businesses to hit S$1 billion by June 30, fully utilising the MAS support under its low-cost Singapore-dollar facility. Its expected loan amount of S$1 billion will exceed the total government-assisted loans disbursed to the same customer segment during the 2008-2009 global financial crisis.

Cost savings from MAS's facility will be completely passed on to customers, said OCBC, by bringing the interest rate of the government-assisted temporary bridging loan to 2-3 per cent. OCBC's rates stood at around 6 per cent at the start of the year.

DBS also made public on Monday it has already approved over 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.

The bank will pass on cost savings from MAS' facility to its SME customers, who will benefit from lower lending rates of around 2-3 per cent. It has also waived all processing fees for the new loans since April 1.

"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 in a statement on Monday.

The banks have committed to loan approvals sealed in a few days, quick disbursements, and have waived processing fees for loan applications.

UOB saw a significant increase in the number of loan applications for the SME working capital loan and temporary bridging loan schemes, with approvals growing 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. The (MAS) facility will reduce our funding costs, enabling us to pass on these savings in full to our SME customers and to provide them with much-needed funds at lower interest rates of between 2-3 per cent during this crucial point in time," said UOB head of group commercial banking Eric Tham in a statement.

The facility, coupled with ESG's higher risk-share for their loan schemes, will support the bank in providing more SMEs, including those that may have previously been ineligible, with essential financing support, said Mr Tham. Earlier in April, the Singapore government increased its risk sharing of loans from 80 per cent to 90 per cent for some SME loans.

MAS said by providing financial institutions funding at the low interest rate of 0.1 per cent per annum, the facility reduces the financial institutions' cost of funds for loans made under the ESG loan schemes. This will help SMEs manage their cash flow better amid the current Covid-19 pandemic.

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."

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 the SME working capital loan (EFS-WCL).

Png Cheong Boon, CEO of ESG, said: "We are happy to partner MAS to provide lower cost of funding to the financial institutions. Together with higher risk sharing by the government, we hope that financial institutions would be able to extend loans under the TBLP and EFS-WCL 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."

MAS said it is ensuring ample Singdollar (SGD) funding to banks in Singapore, by maintaining a high level of SGD liquidity in the banking system. This keeps credit flowing to banks, so that financial institutions can continue to intermediate credit to individuals and businesses in Singapore.

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.

Under the TBLP, eligible enterprises could from April 8 this year borrow up to S$5 million, with the interest rate no more than 5 per cent per annum, via financial institutions.

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 if they wish.

This relief was made available to SMEs that are still paying interest and are in good standing with their banks and finance companies, as defined by those with loans not more than 90 days past due as at April 6, 2020.

MAS had estimated that more than S$40 billion of existing loan facilities to SMEs would likely qualify for this opt-in relief scheme.