OCBC positive on repayment of SME loans in Singapore, but on the watch for Malaysia, Indonesia

OCBC is not seeing any cause for concern on the repayment of loans among small and medium-sized enterprises (SMEs) in Singapore even as Covid-19 relief measures get extended further, but it is "definitely watching" neighbouring countries Malaysia and Indonesia closely for signs of business distress, said a top OCBC executive.

Linus Goh, OCBC's head of global commercial banking, told The Business Times that repayment trends in Singapore have been "quite positive", with the numbers that are still under moratorium a "very small proportion of the SME base".

Those that need to have extensions beyond the current moratorium programmes are "so far just only trickling in", he noted. "I won't worry too much about that, relative to the region."

It is a different story when it comes to OCBC's other key markets Malaysia and Indonesia, which have been struggling to keep the pandemic under control.

In Malaysia, for instance, a blanket six-month moratorium on all loans for SMEs was announced on June 28 this year amid an extended country-wide lockdown. This is similar to its initial six-month moratorium implemented in 2020, except that businesses will now have to apply for the deferral instead of having to opt out.

Mr Goh estimates 20 to 30 per cent of SMEs in the region will require extensions in their moratoriums.

On the back of the pandemic, industry non-performing loans notched up last year, and could continue to rise this year if measures extend further, he cautioned.

"If the disruption is for a defined period, it's much easier for businesses to cope with as you can make decisions," he said.

That was one of the reasons why Singapore's Phase 2 (Heightened Alert) period in May and June this year was more manageable as people knew what to expect and when the country will come out of it, making it easier to contain, said Mr Goh.

According to OCBC's SME Index released on Thursday, SMEs made a remarkable recovery in the second quarter from a year ago, rebounding from a low of 40.1 to 59.5.

The index, derived using the SME transactional data of over 100,000 OCBC customers in Singapore with annual sales turnover of up to S$30 million, provides a barometer of SME business health and performance. It is derived from a composite of indicators including collections, payments, cash flow and operating transactions of the SMEs with OCBC.

A score above 50 signifies improved health and a score of below 50 shows a deterioration relative to the same period a year ago.

The figure of 59.5 is not just higher compared with a year ago when Singapore implemented its circuit-breaker measures, but also up from the 51.2 recorded in the first quarter. It is also the highest among the five quarters that OCBC has tracked.

Recovery was found to be broad-based, with industries such as food and beverage, business services, healthcare, transport and logistics, infocomm and technology (ICT) and building and construction going into expansionary territory despite the Phase 2 (Heightened Alert) measures.

"The effect of circuit breaker (in 2020) obviously bore more heavily on the industries in the second quarter of last year," said Mr Goh. "This year, I think it was more muted because the period was shorter, and also the restrictions were a bit less severe."

"But I think more importantly, the SMEs were more prepared," he added.

That being said, he cautioned that even within industries, not all sub segments do well. For example, within business services there are SMEs in tourism and Mice (meetings, incentives, conferences and exhibitions) that continue to be affected by Covid-19 restrictions.

While some churn is the norm especially among the smaller businesses, Mr Goh said that there could be more companies shuttering than usual, on the back of the extended impact of the pandemic which has been ongoing for more than a year.

"The number of companies falling away are maybe in bigger numbers than normal, but it's very hard to tell the full extent because there are many below the radar and do not necessarily engage in business loans or business contracts, so they can come and go without really too much disruption," he said, referring to the micro SMEs.

While there is still uncertainty in the air, Mr Goh believes that certain sectors should continue to take off especially in the second half of the year, namely healthcare, ICT (infocomm technology) , transport and logistics and wholesale trade, with the latter two segments due to an expected resumption in global trade.

"The truth of the matter is that we are going to be living with this virus for some time to come yet, so you are going to be still dealing with a volatile, uncertain market in general," he said.

"I think the SMEs who have their costs under control, those who are agile, those who have aggressively digitalised and diversified their markets and sources... these are the ones who will be much better prepared for the second half."