This article first appeared in The Edge Malaysia Weekly on May 6, 2019 - May 12, 2019

BANKS are intensifying their focus on small and medium-sized enterprises (SMEs), going by the spate of announcements in recent weeks of their plans for new and more aggressive financing for SMEs over the next few years.

While it is, to some extent, a case of the banks showing support for the government’s push to ensure that SMEs — the backbone of the economy — have access to financing, industry sources say that it is also a lucrative lending segment.

“The margins [from SME loans] are one of the highest for banks. The risks [for lending to SMEs] are higher, hence the returns are better. That’s why the banks are targeting this segment ... the yields are higher than that of consumer or corporate loans,” a banking analyst says.

The higher-yielding SME loans have helped some banks hold up better amid margin pressures in recent years.

While some such as Alliance Bank Malaysia Bhd and Public Bank Bhd have been targeting SMEs as a key part of their growth strategy for many years now, most other banks seem to have made a concerted effort to accelerate SME lending only in recent years.

“Some of the government-linked banks just woke up [to the trend] ... hence, the ‘frenzy’ now,” says a senior banker.

SMEs are an important component of the economy, numbering about a million or 98.5% of business entities in Malaysia. They contributed 37.1% to the country’s gross domestic product in 2017 and accounted for 66% of the workforce and 17.3% of exports, according to the Department of Statistics Malaysia.

Yet, despite their importance, they are still underserved in terms of financing, says AmBank Group CEO Datuk Sulaiman Mohd Tahir.

“I still think that this group is underserved. If you want to create a successful Malaysia, you must create successful SMEs,” he says.

Financial institutions (FIs) remain the primary source of financing for SMEs, accounting for 97% of total SME lending.

According to analysts, growth in SME financing by FIs has declined in recent years amid the slowing economy.

However, the proportion of SME financing to total financing has increased. Last year, SME financing constituted 48.7% of total financing outstanding by FIs to businesses (2010:37.6%) and 17.5% of total financing outstanding (2010:14.4%), according to Bank Negara Malaysia’s Financial Stability and Payment Systems Report 2018.

The proportion of SME financing is likely to continue to rise in the next few years, given the plans that banks have, with several jostling to become leaders in SME banking.

Asked about the higher risks faced by banks in lending to SMEs, CIMB Group Holding Bhd’s group CEO Tengku Datuk Seri Zafrul Aziz points out that the non-performing loan (NPL) ratio in this space has fallen significantly over the last decade.

“SMEs today have improved vastly in the past 10 years and this is reflected in low industry NPL, in the range of 2%, compared with a higher NPL rate of more than 8% about 8 to 10 years ago. This is due to improved financial literacy and better understanding of financial management and business. In addition, enhanced transparency in banking conduct, supported by Bank Negara’s eCCRIS (Central Credit Reference Information System), has helped business owners to be more responsible and prudent in managing their business and cashflow,” he tells The Edge.

He adds: “Every bank has its own risk framework based on its own risk appetite. However, for SMEs who do not have collateral, CIMB has partnered with Credit Guarantee Corp and Syarikat Jaminan Pembiayaan Perniagaan to provide unsecured loans.”

He expects Malaysian SMEs’ GDP growth to come in at 6% to 8% over the next few years — higher than the overall economic growth projections out there — supported by a low interest rate environment and low inflation.

“The cost of doing business and external factors will continue to be challenging but we are optimistic on the prospects of SMEs in the country,” Zafrul says.

In late March, CIMB Bank Bhd — seen as making a comeback in this segment in recent years — said it would disburse at least RM15 billion this year and the next to help finance at least 100,000 SMEs in Malaysia. From 2016 to 2018, the bank disbursed RM17.8 billion to fund 17,000 SMES.

And last month, all seven other banks announced more lending support for SMEs.

AmBank (M) Bhd said it would disburse RM20 billion in SME loans in the next three years. Last year, it gave out RM6.14 billion to 2,200 SMEs, marking a 30.6% growth from RM4.7 billion in 2017. It is also piloting a programme to approve loans within 24 hours starting this month.

Malayan Banking Bhd, the country’s largest bank, said it plans to disburse RM35 billion in loans to SMEs over the next three years.

Meanwhile, RHB Bank Bhd targets to grant RM31 billion in new and additional financing for SMEs by 2021. It approved RM7.2 billion in new loans to more than 4,000 SMEs last year. The bank hopes to clinch the third spot in the SME segment, from fourth now, with its market share of 9.06%, says group managing director Datuk Khairussaleh Ramli.

Public Bank, which claims to be the largest local financier for the SME segment, plans to approve RM40 billion in SME loans in the next three years. Last year, it approved RM11 billion of such loans.

Alliance Bank’s CEO Joel Kornreich told The Edge recently that the bank’s SME loans had a compound annual growth rate (CAGR) of 9.8% in the last three years compared with the industry’s 5.1%. He foresees that it will grow at a CAGR of 13% in the next three years, given the bank’s new initiatives to expand the segment.

As for Hong Leong Bank Bhd, it expects to approve RM7.5 billion in loans to SMEs this year.

Affin Bank Bhd says the SME segment, its “mainstay” moving forward, will make up 20% of its total financing portfolio in three to four years compared with about 8% now.

Access to financing less of an issue

A survey of 1,721 SMEs by SME Corp Malaysia in the third quarter last year found that SMEs still have access to financing with a 94.4% approval rate from FIs.

“Of those approvals, 25% of them were made up of first-time borrowers. Interestingly, the demand for loans had increased from only 29.2% recorded in 3Q2017 to 44%, which is the highest application recorded since 1Q2015,” its CEO Noor Azmi Mat Said tells The Edge.

Only 8.7% of the respondents, which covered all economic sectors and industries, had difficulties with their current financing facilities with FIs in the last six months prior to the survey. These were mainly bumiputera-owned SMEs, medium-sized firms and service sector SMEs, he says.

Among the challenges faced by the respondents were a delay in loan approval (32.9%), request for higher collateral (31.5%) and request for additional guarantor (26.2%).

A Bank Negara survey of 1,529 SMEs last year also indicated that access to financing was not a big issue, given the availability of newer and alternative sources. About 22% of the respondents had applied for financing in the six months prior to the survey, with the majority (94%) of their applications being approved.

Difficulty in accessing sufficient financing was ranked low, second to last out of the nine constraints identified by SMEs.

Interestingly, about 46% of the respondents stated that the financing products offered by FIs did not meet their business needs due to high financing costs (50%), insufficient financing amount (42%) and onerous documentation requirements (29%). The average financing rate that respondents were willing to pay was 3.88%, well below the average lending rates of 6.18%, at the time of the survey (2Q2018).

Apart from FIs, SMEs are also able to borrow from government funding agencies and development FIs via schemes and programmes.

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