Friday, December 13, 2013, 06:59
Asia Weekly: Cheap loans remain out of reach

Asian SMEs’ lack of collateral means banks are unwilling to lend at lower interest rates

Lending rates are at record lows in Asia and around the world, but despite the fact that money is cheap in theory, it is generally not accessible to small and medium enterprises (SMEs) in Asia.

Worse still, SMEs in the region typically face considerably higher costs of borrowing than their counterparts in the West, where lending rates remain relatively flat at close to zero percent.

Higher interest rates make money more expensive, particularly for SMEs that are more dependent on outside financing than larger conglomerates and are less capable of negotiating with banks for better terms.

The Asian Development Bank (ADB) says SMEs in the region often have a difficult time accessing financing for a number of reasons. Some do not have any collateral, such as real estate or intellectual property that can be used to secure loans.

Others have limited track records or weak management systems and uncertain profitability. These issues make banks skittish of lending to them, or at least lending the amounts necessary to make a difference to their growth.

When they do lend to SMEs, the real rates after taking into account various fees are much higher than the low lending rates.

“Most Asian countries have established a bank-centered financial system, (so) capital market financing is not a realistic option for SMEs,” noted Shigehiro Shinozaki, of the ADB in a study last December.

As a result, most SMEs rely on informal borrowing or pay the relatively high rates that banks demand.

In CPA Australia’s recent Asia-Pacific Small Business Survey 2013, the accounting body found that 15 percent of SMEs surveyed in Hong Kong said problems accessing finance were restricting growth.

In Singapore, just 19 percent of SMEs said they found accessing finance “very easy” compared to 49 percent in 2012.

The problem is not the availability of capital but rather the fact that the global financial system is not making it easy for credit to flow to SMEs while banks are less willing to take on risk, says Glenn Levine, senior economist at Moody’s Analytics.

“The financial piping for credit is broken,” says Levine. “The financing issue is an ongoing issue, but it is an issue for everyone.”

Small businesses are a significant component of most economies in the region. SMEs account for more than 99 percent of all enterprises in Japan, South Korea, China, Indonesia, Laos, Malaysia, Philippines, Singapore and Thailand.

They also account for a large proportion of jobs, ranging from 59 percent in Malaysia to 97 percent in Indonesia, while their contributions to GDP range from about 32 percent in Malaysia to more than 58 percent in China.

In a blueprint for the development of the SME sector, the ASEAN Economic Community Council pointed out that SMEs are the backbone of most of the region’s economies but limited access to finance, technologies and markets is making it difficult for the sector to develop.

Ironically, borrowing costs are at record lows in many markets.

The benchmark rate in the United States, for example, is 0.25 percent per year and in Canada it is 1 percent. These low rates are also in evidence in the more developed markets in Asia. The benchmark lending rate in Hong Kong is 0.5 percent, although banks charge considerably more to small businesses. Various fees add to the costs. In Japan, the benchmark rate is zero. In Singapore, it is 0.05 percent.

The rates in other markets are significantly higher, but still much lower than a decade ago. Malaysia’s lending rate remains at 3 percent after a central bank meeting in November. In the Philippines, it is 3.5 percent. The rate in South Korea is 2.5 percent.

The highest rates in the region are in Indonesia, which has behaved as something of a contrarian market.

In November, Indonesia raised its benchmark interest rate by 0.25 percentage points to 7.5 percent. The move took many by surprise. Between August and November, Indonesia’s central bank raised the benchmark interest rate by a full percentage point. Indonesia now has the highest lending rates of any country in Southeast Asia.

Indonesia’s Chamber of Commerce and Industry says lending rates for most businesses are between 11 percent and 13 percent. Micro businesses sometimes have to pay as much as 20 percent per year in interest.

Rates of that magnitude are unusual in the current low-rate environment, but even the low rates have not translated into easy money for small businesses. Although there is plenty of liquidity available, banks have been generally less willing to lend to small businesses since the global financial crisis in 2008.

And the low-rate environment may not last.

For months now, the US Federal Reserve has been preparing world markets for the day when it starts tapering its program of quantitative easing, which has been flooding world markets with $85 billion per month in fresh capital. The Fed recently indicated that tapering could start as early as this month.


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