IT IS commonly known that while a company borrows because it needs money, banks prefer to lend to those that are already financially sound because these companies are less risky. This is especially true in the case of small and medium enterprises (SMEs).
According to a study by the Department of Statistics Malaysia published three years ago, most local SMEs rely on shareholders or generate funds internally rather than turn to banks for financing. The report says only 22% of them approach financial institutions for funds. The other 78% rely on other means, including friends and relatives, leasing firms, suppliers and non-governmental organisations.
While the report did not give any reasons for this, a 2005 report indicated that most SMEs do not seek funding from banks because they lack collateral. This explains why government-linked Credit Guarantee Corp Malaysia Bhd (CGC) works with both local and foreign banks to come up with loan offerings specifically for SMEs. The banks provide the funds and CGC guarantees the loans.
“Financial institutions still consider start-ups risky because they are new and do not inspire sufficient confidence. Most of them are also not able to provide the necessary collateral,” says CEO Datuk Wan Azhar Wan Ahmad.
Established in 1972 by Bank Negara Malaysia, CGC’s role was initially to guarantee SME loans.
An SME that needs to finance its expansion can apply to CGC to have its loan guaranteed. It needs to show that it is creditworthy and that its business is viable. These are essential for a loan application because without collateral, the loan applicant will not be able to pass the bank’s assessment, which is based on five credit factors — character, capacity, capital, condition and collateral.
CGC does not guarantee loans for nothing. It imposes a fee based on the applicant’s risk profile. The riskier the proposition, the higher the guarantee fee, on top of the loan’s interest rate.
According to Wan Azhar, the pricing of the guarantee fee according to risk is fairer than what was done previously — a fixed fee of 0.5% per annum. Moreover, CGC rewards those that have a better credit track record with lower financing costs.
To facilitate the SME business, CGC collaborates with some commercial financial institutions to offer the portfolio guarantee (PG) scheme. “Unlike normal guarantee schemes that appraise loans individually, loan approvals under PG are systemised with minimum human intervention, so as to provide borrowers quicker access to financing,” says Wan Azhar.
In other words, PG accelerates the loan application process. Applications can be approved within three days, but CGC is working to shorten this to just one day. The speedy process is attributed to the upfront mutual agreement on all the eligibility criteria and product features between CGC and its partner financial institution.
How does it work? Loan guarantee applications are submitted directly to the bank. Upon approval, the bank will forward the request to CGC for guarantee. CGC will respond within three business days.
Applicants are assessed under a jointly agreed-to scorecard using simplified fulfilment criteria to determine loan eligibility. Wan Azhar says that under the PG scheme, financial institutions also enjoy a fixed guarantee cover percentage for the amount that is agreed upon. “With this, [the financial institution] can enjoy greater confidence when granting loans to SMEs.”
Currently, the financial institutions offering this facility include Standard Chartered Bank, OCBC Bank, Public Bank, RHB Bank and Alliance Bank.
On Sept 15, CGC signed a PG agreement with SME Bank, leading to the offer of RM30 million in SME financing. The financing facilities range from RM100,000 to RM500,000, with fixed rates of 5% to 7%. SME Bank expects to finance 200 SMEs under this programme in a year.
Though the end-pricing or interest rate of these loans is ultimately determined by the respective financial institutions, CGC says the pricing is normally capped at BLR+5%.
On top of this, the applicant will be charged a guarantee fee, which is priced according to its risk profile, credit evaluation standard, past non-performing loan experience, and eligibility criteria of the respective PG scheme.
Apart from collateral, credit track record is the most important element in determining creditworthiness. However, smaller businesses often lack comprehensive financial records for a persuasive loan application. Therefore, in collaboration with global business credit information provider, Dun and Bradstreet Malaysia, and The Association of Banks in Malaysia, CGC established Credit Bureau Malaysia, whose database provides a comprehensive and reliable SME information and ratings system.
The bureau has issued more than 800,000 SME-related credit reports and rated over 400,000 SMEs to date. It draws data from various sources, such as the Companies Commission of Malaysia, Central Credit Reference Information System (CCRIS), the Dishonoured Cheque Information System (DCHEQS) and non-bank credit data from SMEs and non-bank credit grantors.
Besides providing reports for submission of applications, the bureau’s material also shows the weaknesses of a loan application and identifies areas of concern for the SMEs so that they can take the necessary action.
To promote good credit track records, CGC offers rebates on its guarantee fee. These are available to customers who have been on a CGC scheme for at least 1½ years and have done nothing to hurt their record.
CGC allocated RM1.7 billion for the rebate programme this year. The programme has no expiry date or maximum portfolio cap as it is aimed at easing SME financing costs. CGC intends to disburse up to RM30 million to start-ups, which make up 75% of the SMEs in Malaysia.
It is also introducing new schemes, with an eye on easing the limited access to finance that SMEs are always complaining about. In May, it rolled out the BizMula-1, a shariah-compliant direct financing scheme that is now available at its 16 branches nationwide.
After more than 40 years in operation, CGC has more than 42 products for SMEs, offering facilities of RM500 to a few million ringgit. Two of the most popular are the credit enhancer scheme (ENHANCER) and Green Technology Financing Scheme (GTFS). These two products also represent the two main functions of CGC — GTFS provides direct loans while
ENHANCER guarantees loans provided by a partner bank.
During the last financial year, CGC guaranteed more than RM1.5 billion in loans, representing 2,368 accounts, of which 35 accounts valued at RM460.9 million came under GTFS, while 825 accounts valued at RM233.2 million were under ENHANCER. CGC aims to guarantee another RM2.7 billion in loans for 5,600 clients in the current financial year.
This article first appeared in Unlisted & Unlimited, The Edge Malaysia Weekly, on 10 - 16 November, 2014.