Tuesday, November 4, 2008

Thailand's small business loan market nearly frozen

Local loan demand unmet

Credit guarantees let SMEs tap market

DARANA CHUDASRI

PHUKET : Of the six trillion baht in estimated demand for small business loans in Thailand, only one-third is being met through commercial bank lending, according to Pichit Akrathit, the executive chairman of the Small Business Credit Guarantee Corp (SBCG).

Dr Pichit, speaking at a conference of the Asian Credit Supplementation Institution Confederation, said the data showed a wide gap between demand and supply in the Thai financial system.

According to the Internal Trade Department, the country's 560,000 registered companies had total equity of around 8.6 trillion baht. Small and medium-sized companies (SMEs) accounted for around 70% of total equity.

"Based on an ideal debt-to-equity ratio of 1:1, then small business loans should amount to around six trillion baht. But as of June, the seven largest banks, with a 70% market share, lent only 1.7 trillion baht in loans to small businesses," said Dr Pichit, who is also president of MFC Asset Management.

He said the SBCG played a key role in offering credit enhancements to allow small businesses to access the credit markets. But as of Oct 15, the SBCG had outstanding credit guarantees of just 22 billion baht, or less than 0.4% of the estimated demand in the market.

"One of the reasons why SMEs are unable to access credit is due to a lack of collateral or guarantees or both," Dr Pichit said. "And SMEs are typically the first victims of cuts in credit lines when the economy slows and banks move to control risk."

Jose Fernando Figueiredo, president of the European Mutual Guarantee Association, said the global credit crunch is increasing demand, and maybe prices, for guarantees across the globe.

At the end of 2007, the European Mutual Guarantee Association had 34 organisations from 18 countries with a guarantee portfolio of $90 billion covering loans of $200 billion. Growth for the credit guarantee market has risen 13% per year over the past three years.

"For 2008, we expect growth to be even higher as credit guarantee firms in many European countries have been asked by their governments to assist SMEs. The European community wants to promote SMEs to help create employment and reduce social problems," Mr Figueiredo said.

In Thailand, authorities plan to merge the SBCG and the SME Development Bank to improve efficiency in providing state-supported financial services to SMEs. Capital funds would increase from 3.8 billion baht to 7.4 billion and operating costs, 1.6 billion baht for both agencies last year, would subside. Cabinet ministers approved the plan yesterday.

At the end of June, the SME Bank had accumulated losses of 1.35 billion baht with non-performing loans of up to 50% of its loan portfolio. The Finance Ministry expects bad loans to decline to 15% of total loans within four years.

For the SBCG, accumulated losses totalled 58.1 million baht as of June, with non-performing guarantees of 18% of its total portfolio.

Pradit Phataraprasit, a deputy finance minister, said credit guarantees would become a business unit within the SME Bank.

"But there will be a 'Chinese Wall' to guard against conflicts of interest or issues of information confidentiality," he said.

The SME Bank, with outstanding loans of around 20 billion baht, has been plagued with losses and bad loans over the past several years, due in part to internal fraud.

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