Credit crunch threatens vulnerable SMEs as rate hike looms

Banks will be averse to SME loans.

Small and medium enterprises in Singapore will have difficulty sourcing for funds once interest rates rise, according to the latest Financial Stability Report by the Monetary Authority of Singapore (MAS).

Banks will be particularly cautious when it comes to extending loans to SMEs because smaller businesses are at greater risk of default, the MAS said.

“Banks’ overall NPL ratio for SME loans has increased from 0.7% in Q2 2014 to 1.3% in Q2 2015. The overall NIM on SME loans has inched up in the last 18 months, from 1.6% in Q4 2013, to 1.8% in Q2 2015, possibly reflecting the pricing in of credit risks on the back of a subdued business outlook,” the MAS said. 

Despite this, financing conditions for SMEs have remained generally positive, with bank credit to SMEs continuing to grow in Q2 2015, albeit at a slower pace. Loans to SMEs grew by 8.2% y-oy in Q2 2015 compared to 13% in Q2 2014. 

“Looking ahead, SMEs could face tighter financing conditions as banks expect to tighten credit terms and conditions in response to the economic uncertainties. Banks reported higher NPL ratios under the Industry-Wide Stress Test 2015 stress scenario for loans to SMEs across major industry sectors. Credit risk-sharing schemes for SMEs, such as those implemented by the government in 2008 – 2009, could help to ensure that viable SMEs continue to have access to credit to sustain their operations,” said MAS.