[SINGAPORE] Banks in Singapore are maintaining their support for small and medium enterprises (SMEs), despite the higher funding requirements for the higher risk that banks have to bear. But there are concerns that the higher cost of SME funding would be passed on to the small businesses.
One way that higher funding cost is captured in the Basel III regulatory framework is through the net stable funding ratio (NSFR), through which banks show that they are not overly reliant on short-term or unstable funding over a one-year period.
With an increasing minimum capital requirement under Basel III, banks have to set aside more capital per dollar of risk-weighted assets, and this impacts SME exposures more relatively, said chief financial officer at DBS, Chng Sok Hui.
"Basel III rules have never specifically targeted SME exposures: it is not a problematic asset class that triggered the global financial crisis. However, SME exposures are typically higher risk and thus invite higher risk weights," she said.
Still, SME lending remains one of the bank's priorities, with income from SMEs growing 11 per cent last year to $1.4 billion.
"We are able to grow the franchise, and stand by our SME customers because of our strong capital ratios," said Ms Chng.
United Overseas Bank (UOB) and OCBC Bank echoed similar views, noting that the segment is strategically important to the banks.
"In the small business segment, the risk weighting for assets is low because the loan portfolio is made up of smaller-sized loans spread across a big group of customers. In other words, it is a business with diversified risks," said Victor Lee, group head of business banking at UOB.
But SMEs, having low bargaining power with banks, may bear a disproportionate amount of this increased cost if costs are passed on by banks, said Gary Chia, head of financial services regulatory compliance at KPMG in Singapore.
"Banks which typically finance SMEs need to improve their capital quality, mostly by resorting to retained earnings. This implies an indirect pressure on margins for these banks, which needs to be passed on to their customers - the SMEs."
Still, while Basel III imposes higher capital requirements on banks for lending to smaller SMEs, key SME banks here have already been operating on risk-based models before the introduction of Basel III, noted Linus Goh, chairman of the Singapore Business Federation's (SBF) SME sub-committee on financing.
"We believe the enhancement to the government risk-sharing from 50 per cent to 70 per cent for the microloan programme in Budget 2014 will also help improve the financing to small businesses," said Mr Goh, who is also OCBC's head of global commercial banking.
There are signs that lending to SMEs have not eased. Based on the SBF-DP SME Index for the first quarter of this year, bank lending has increased and there appears to be a smaller number of SMEs facing financing challenges. Still, last year's SME development survey showed that there are SMEs that continue to have difficulty accessing funding from banks, either because of the lack of a track record or sufficient assets for collateral.
Broadly, Basel III should prompt banks to evolve from universal banks to specialist lenders to improve their margins, said Lim Eng Hock, partner and practise leader at Ernst and Young.