Minister Lim Hng Kiang's oral reply to Parliament Questions on Financing Schemes

Question No 892 of Notice Paper No 304 of 2008

Question No 893 of Notice Paper No 305 of 2008

Question
Mr Seah Kian Peng

To ask the Minister for Trade and Industry if he will provide an update on the Government's $2.3 billion loan support package for businesses, specifically (i) how many applications have been received and what is the approval rate; (ii) whether the loan schemes are meeting the objectives intended and are up to expectations; and (iii) what are the feedback from businesses.

Mr Zaqy Mohamad
To ask the Minister for Trade and Industry (a) how does his Ministry plan to work with banks to relax the lending criteria for loans under the Government's $2.3 billion loan support package for businesses; (b) whether there are plans by the Government to (i) set conditions on the disbursement of the package by the banks or (ii) lend to enterprises directly; and (c) what are his Ministry's KPIs on the disbursement of the package to measure the success of this initiative.

Answer
Let me first set out the broader context against which the Government’s loan support schemes exist.

We are facing a broad-based global economic downturn and the Singapore economy is in a recession. Loans may decline further in the coming months. This happened during the Asian Financial Crisis and is likely to happen now as well. Demand for loans will moderate with businesses scaling back investment and expansion plans. Banks will become more cautious with business prospects of borrowers turning more uncertain.

There have also been knock on effects here from the global financial turmoil. Bond and equity market issuances have thinned substantially, and the foreign banks operating in Singapore, which collectively make up more than 40% of our domestic credit market, were affected by the crisis in the US and Europe. The actions taken by governments and central banks in Europe and the US to recapitalize bank and guarantee bank borrowings have improved confidence in the international financial system and that of individual banks, although there remain significant stresses and uncertainties ahead. Our local banks on the other hand are not facing a capital or liquidity crunch and their capital adequacy ratios more than meet MAS' requirements. Overall, the interbank market in Singapore continues to function normally; commercial cost-of-funds is low and our financial system remains fundamentally sound.

Our government’s loan schemes aim to complement commercial lending by helping viable but riskier companies access credit. We work through the banking system by sharing a sizeable portion of the default risk. These schemes have been in place for many years, and loan commitments had increased even before additional enhancements took effect in Dec 2008. They rose by around 50% to over $1.0 bn in 2008, compared to $680mn in 2007.

Against a backdrop of economic downturn and greater risk aversion, we moved pre-emptively in Dec to further enhance our loan schemes. We increased government risk sharing from 50% to 80%, raising loan quantum limits, introducing a Bridging Loan Programme (BLP) for working capital needs, and reducing interest rates by 1.25%.

These enhancements have been in place for less than 2 months. It is too early to assess their effectiveness but preliminary indications are promising. Participating banks have reported an increase in applications with almost 500 applications submitted in Dec alone. Many of these applications are still being processed by the banks. Approved loans increased by 30% in Dec 2008 compared to Dec 2007 (from $62m to $80m). Working capital loans increased while asset based loans saw a dip. This is not unexpected, with businesses cutting back on fixed asset investments amidst the unfavorable economic climate.

Our next challenge is to heighten awareness of these schemes and assist SMEs in applying for them. Many SMEs may be unfamiliar with the process. SPRING has therefore organized a pipeline of financing seminars in collaboration with the business chambers and industry associations. To facilitate SME loan applications, SPRING, together with our 5 Enterprise Development Centers and the Singapore Business Federation, has just launched the Financial Facilitator Programme. Under this programme, the six centers will provide financial advisors to advise SMEs on financing strategies and loan applications. SMEs can seek professional financial advice at the centers at no charge. Companies requiring assistance should approach EDCs for help.

While efforts are being made to help support access to business credit, companies still have the prime responsibility to furnish the relevant data for their applications and to show that their businesses are viable and bankable. It is only natural, in any recession, that companies seeking loans are questioned in more detail and their applications are scrutinized.

MP Zaqy Mohamed has asked how MTI intends to work with banks to relax their lending criteria for the financing schemes, and whether we set conditions on the disbursement of such loans by the banks. We do not have disbursement requirements nor do we influence the bank’s risk assessment. It is important that the banks do the proper due diligence in ensuring that loans are extended to companies with viable business propositions. This is also why we do not set utilization targets.

The Government is also not in a good position to lend to enterprises directly. We do not have the expertise and are not well placed to do so. Credit risk assessment is best done by the professionals in our financial institutions, who have the necessary domain knowledge. Our preferred approach is to share a significant portion of the financial institutions’ risks, up to 80%, and defray some of their administrative costs. This not only encourages more lending, but also ensures that our public funds go to deserving companies.

Government loans therefore play a targeted role; they are not intended to replace commercial lending. Our primary objective remains to assist viable but riskier companies access credit which they would otherwise be unable to get at reasonable rates.

Since implementation of the enhancements, feedback from the business community has been positive. They have welcomed the move to increase risk sharing by the government, the increased quantum's as well as reduced interest rates. There has been continued feedback on the need for working capital and difficulties in securing such loans. We are assessing and will revise our schemes in line with the situation.