<TABLE cellSpacing=0 cellPadding=0 width=452 border=0><TBODY><TR><TD vAlign=top width=452 colSpan=2>Published January 24, 2009
</TD></TR><TR><TD vAlign=top width=452 colSpan=2>Budget 2009
</TD></TR><TR><TD vAlign=top width=452 colSpan=2>Doubts linger over steps to unfreeze credit
Some worry borrowers will hoard cash; some banks keen to preserve capital
By CONRAD TAN
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EVEN as the government tries its best to get banks to keep lending to businesses, serious obstacles remain that could impede the flow of credit to the broader economy, industry sources here say.
<TABLE class=picBoxL cellSpacing=2 width=100 align=left><TBODY><TR><TD>
</TD></TR><TR class=caption><TD>WAITING FOR GREEN
Despite the government's measures to stimulate lending, obstacles that could impede the flow of credit to the broader economy still remain</TD></TR></TBODY></TABLE>Senior bankers whom BT spoke to yesterday said that the measures to stimulate bank lending announced on Thursday would help to relax credit conditions somewhat, but were unlikely to spur a big increase in new lending.
And any money that is lent out to mid-size or large companies could be hoarded by the firms instead of being used to pay small suppliers, which would limit the benefits to the broader economy.
The government said on Thursday that it would insure 80 per cent of the risk of new bank lending to local businesses of all sizes, and foreign small and medium-size enterprises (SMEs) for one year, starting Feb 1. Loans of up to $5 million and up to four years maturity qualify, including the refinancing of existing loans, and the money can be used as general working capital. Previously, loans were capped at $500,000, and the state bore just half of the risk.
The scheme 'should see good demand', said Tan Chia Seng, head of commercial banking at Citibank Singapore. 'Working capital is what SMEs really need now, so I think that will grow.'
But the head of SME lending at another bank, speaking on the condition of anonymity, said that the scheme could merely move money from banks to bigger SMEs, instead of being passed on to smaller firms that are being squeezed hardest by the credit crunch.
'We strongly believe that liquidity will flow from banks to businesses,' he said. 'But what will the bigger companies do with the cash? Will they pay their suppliers or keep it for themselves?'
Some of his borrowers have admitted that they were reluctant to reveal that they had access to new funds from the bank, for fear that it would trigger a flood of payment demands from their suppliers, he said. 'Those who have money are keeping very quiet.'
One possible solution is to require that a portion of the funds lent out under the risk-sharing scheme be used to pay a borrower's own creditors, he said.
But a wider problem is that banks themselves are eager to preserve their capital ahead of an expected rise in defaults on existing loans, even though the government and businesses would prefer them to keep lending. And firms themselves are facing declining sales, which makes them less attractive as borrowers.
'The risk aversion right now is quite high. Even though they know that they're only on the hook for 20 per cent, banks are not prepared to consider that, if they don't like the credit,' said the Singapore head of a foreign bank, who also spoke on the condition of anonymity.
At the heart of the problem is that many companies - both big and small - are struggling in the face of plummeting orders and may have trouble repaying loans, at least from the banks' perspective, he said.
'If the companies are not doing well, the banks won't lend, whether it's 10 per cent or 20 per cent. It's not a matter of size or amount - if the credit is bad, they won't want to put their money on the table.'
Ian MacDonald, president of Hong Leong Finance, which specialises in lending to SMEs, said that the government was 'doing its best' to help, but that 'it's still against the backdrop of a very tough economic landscape'.
'We want to lend, but the rationale for lending must be sound.' he said. 'You cannot finance a bad deal.'
Similarly, Citi's Mr Tan said that the government's initiative to share three-quarters of the risk on trade financing loans would slow the decline in overall trade financing, but wouldn't stop it entirely. 'The real issue is the declining order books' of firms, he said.
At another foreign bank, the Singapore head of corporate lending said that the government's move to shoulder more risk was encouraging, but doubts remained about how easily banks would eventually be able to obtain government help. 'That may be a hurdle. If I'm approving a loan, I would think: what's my recovery? How do I make sure that I'm covered?'
</TD></TR></TBODY></TABLE>
</TD></TR><TR><TD vAlign=top width=452 colSpan=2>Budget 2009
</TD></TR><TR><TD vAlign=top width=452 colSpan=2>Doubts linger over steps to unfreeze credit
Some worry borrowers will hoard cash; some banks keen to preserve capital
By CONRAD TAN
<TABLE class=storyLinks cellSpacing=4 cellPadding=1 width=136 align=right border=0><TBODY><TR class=font10><TD align=right width=20>
</TD><TD>Email this article</TD></TR><TR class=font10><TD align=right width=20>
</TD><TD>Print article </TD></TR><TR class=font10><TD align=right width=20>
</TD><TD>Feedback</TD></TR></TBODY></TABLE>EVEN as the government tries its best to get banks to keep lending to businesses, serious obstacles remain that could impede the flow of credit to the broader economy, industry sources here say.
<TABLE class=picBoxL cellSpacing=2 width=100 align=left><TBODY><TR><TD>
</TD></TR><TR class=caption><TD>WAITING FOR GREENDespite the government's measures to stimulate lending, obstacles that could impede the flow of credit to the broader economy still remain</TD></TR></TBODY></TABLE>Senior bankers whom BT spoke to yesterday said that the measures to stimulate bank lending announced on Thursday would help to relax credit conditions somewhat, but were unlikely to spur a big increase in new lending.
And any money that is lent out to mid-size or large companies could be hoarded by the firms instead of being used to pay small suppliers, which would limit the benefits to the broader economy.
The government said on Thursday that it would insure 80 per cent of the risk of new bank lending to local businesses of all sizes, and foreign small and medium-size enterprises (SMEs) for one year, starting Feb 1. Loans of up to $5 million and up to four years maturity qualify, including the refinancing of existing loans, and the money can be used as general working capital. Previously, loans were capped at $500,000, and the state bore just half of the risk.
The scheme 'should see good demand', said Tan Chia Seng, head of commercial banking at Citibank Singapore. 'Working capital is what SMEs really need now, so I think that will grow.'
But the head of SME lending at another bank, speaking on the condition of anonymity, said that the scheme could merely move money from banks to bigger SMEs, instead of being passed on to smaller firms that are being squeezed hardest by the credit crunch.
'We strongly believe that liquidity will flow from banks to businesses,' he said. 'But what will the bigger companies do with the cash? Will they pay their suppliers or keep it for themselves?'
Some of his borrowers have admitted that they were reluctant to reveal that they had access to new funds from the bank, for fear that it would trigger a flood of payment demands from their suppliers, he said. 'Those who have money are keeping very quiet.'
One possible solution is to require that a portion of the funds lent out under the risk-sharing scheme be used to pay a borrower's own creditors, he said.
But a wider problem is that banks themselves are eager to preserve their capital ahead of an expected rise in defaults on existing loans, even though the government and businesses would prefer them to keep lending. And firms themselves are facing declining sales, which makes them less attractive as borrowers.
'The risk aversion right now is quite high. Even though they know that they're only on the hook for 20 per cent, banks are not prepared to consider that, if they don't like the credit,' said the Singapore head of a foreign bank, who also spoke on the condition of anonymity.
At the heart of the problem is that many companies - both big and small - are struggling in the face of plummeting orders and may have trouble repaying loans, at least from the banks' perspective, he said.
'If the companies are not doing well, the banks won't lend, whether it's 10 per cent or 20 per cent. It's not a matter of size or amount - if the credit is bad, they won't want to put their money on the table.'
Ian MacDonald, president of Hong Leong Finance, which specialises in lending to SMEs, said that the government was 'doing its best' to help, but that 'it's still against the backdrop of a very tough economic landscape'.
'We want to lend, but the rationale for lending must be sound.' he said. 'You cannot finance a bad deal.'
Similarly, Citi's Mr Tan said that the government's initiative to share three-quarters of the risk on trade financing loans would slow the decline in overall trade financing, but wouldn't stop it entirely. 'The real issue is the declining order books' of firms, he said.
At another foreign bank, the Singapore head of corporate lending said that the government's move to shoulder more risk was encouraging, but doubts remained about how easily banks would eventually be able to obtain government help. 'That may be a hurdle. If I'm approving a loan, I would think: what's my recovery? How do I make sure that I'm covered?'
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