In the past week, I came across a few newspaper articles addressing the issue about the difficulty for Small and Medium Enterprises (SME’s) to obtain bank loans that I find interestingly confusing.
Bank Negara commented that banks are over cautious even after the central bank gave assurance that ample liquidity in the banking sector and have the ability to lend. While Bank Negara had led the move by cutting the overnight policy rate and statutory reserve requirement for reduced cost of funds, many banks are not releasing their “over” cautious position. It was also reported that banks are already reviewing credit risk profile of existing loans and determine if these SME companies can still satisfy the repayment schedule, or if their assessment shows a high default risk profile, the banks will either reduce the facility or in certain serious cases, calling bank the facility by demanding immediate repayment. This action will contribute to economic slowdown and financial crisis, globally.
The Association of Banks in Malaysia (ABM) responded to this comment that the perception is inaccurate. According to ABM’s chairman, as part of the ongoing loan reviews, banks will need to assess and decide if credit lines given to the customers are fully utilized or reduced. This is to allow better impact on other lending activities. He has also commented that there has been an overall increase in SME loans being approved at 31 December 2008 as compared to the previous year.
Comments from these newspaper articles are all given by leaders of their respective organization. I did some extended informal findings from some rank and file employees, mainly loan officers from both local and foreign banks. Their comments in general are as follows:-
- They received orders from higher management to freeze most loan application from SME’s since the middle of 2008.
- Collateral requirements are extremely unrealistic. Example, one-for-one cash collateral (say fixed deposit) for the facility (say overdraft or term loans).
- Trade lines such as bank guarantees and Letter of Credits are no longer readily accepted by the banks, even those lines issued by international renowned financial institutions.
- Banks are moving toward retail loans such as credit cards, personal loans, housing loans and car loans. This is because the amounts are much lower and their risk exposures are spread over a wider customer base.
Recently, I had dinner with 2 very interesting personalities, mainly due to the entities their working for. Being an “outsider”, I got to hear and appreciate views from both these guys, both are in the middle management in their respective employers. One of them is working for a property developer while the other person works in a bank as a risk analyst, in charge with recommending if a loan can be approved.
From the commercial entity view point, banks are supposed to provide “umbrella when it rains”. My friend from the commercial entity commented that in actual fact, banks give loan when not required, and withdraw the facilities when they need these facilities most. Banks do not support them in their difficult times. In fact, banks created more problems for them by reducing credit lines, demanding immediate loan repayments, and threatening to call for default if their demands are not met.
My friend from the bank immediately responded, commenting that banks are also commercially driven, and that they have to protect themselves to ensure survival. A simple error is their risk assessment will give rise to loan default. There are too many experiences within the banking industry that loans approved to seeming good companies became delinquent due to many unscrupulous businessmen who use the funds for their personal benefits at the detriment of the good companies. Therefore, the banks have to be very cautious when reviewing loan applications to minimize the default risk.
From this simple dinner, I got to appreciate that regardless whether it is fact or perception that SME’s are finding it hard to obtain bank loans, the bottom line is that SME’s and banks have their own roles to play within the commercial world, for survivability, profitability and accountability to interested parties.