MAS eases rules on finance companies, opens pipeline of funds to SMEs

Singapore

THE Monetary Authority of Singapore (MAS) said on Tuesday that it will relax its rules binding finance companies and make it easier for small and medium-sized enterprises (SMEs) to get unsecured loans through them.

With this liberalisation, Singapore's three finance companies will be able to extend collateral-free loans of up to S$550 million to small businesses.

The regulator said it will also relax its policy of barring foreign takeovers of finance companies.

It said: "This will accord finance companies greater flexibility to explore strategic partnerships and innovative business models that can strengthen their SME financing business."

MAS said it was prepared to consider an application for a merger or acquisition if the prospective merger partner or acquirer commits to maintaining SME financing as a core business of the finance company.

Another condition is that the newcomer must have expertise in SME financing and present proposals to enhance the finance company's SME lending activities with new technologies, methodologies or business models.

There are three licensed finance companies in Singapore - Hong Leong Finance, Sing Investments & Finance and Singapura Finance. In Q2 2016, they accounted for just under S$7 billion or 8.5 per cent of the total outstanding SME loans of S$82.6 billion.

The estimated 188,000 SMEs in Singapore are a backbone of the economy, providing two-thirds of jobs here.

Lee Sze Leong, chief executive of Sing Investments & Finance, said: "For the three of us, the business model is so old, so archaic, from our grandfathers' time, (and it has been) because of the restrictive nature of the rules."

He said he welcomed the relaxation of the rules to allow third-party partners because this will open the way for finance companies to tap the latest available business models instead of trying to go it alone.

For example, some online-lending platforms lean on technology for auto-assessment tools that are able to extract information about SMEs' finances.

Sing Investments & Finance has S$1.6 billion in outstanding SME loans, all of which are collateralised. Mr Lee said the finance company has not provided unsecured loans, given that it has made little sense to the customer under the existing restrictions.

"I just tell my customers it's not worth their doing the documentation for S$5,000," he said.

MAS will also raise the limit on a finance company's aggregate uncollateralised business loans to 25 per cent of its capital funds, from 10 per cent currently.

This higher limit means the three finance companies will be able to extend unsecured loans of up to S$550 million, using their current S$2.2 billion in aggregate shareholders' equity as a proxy for capital funds.

The limit on uncollateralised business loans to a single borrower will be raised to up to 0.5 per cent of capital funds, from the current S$5,000.

MAS said: "These changes will better enable finance companies to serve their SME customers, many of whom require unsecured credit for working capital needs."

Jamie Teo, chief executive of Singapura Finance, said that with the changes, finance companies will soon be able to provide unsecured loans like bridging or project loans to SMEs.

A Hong Leong Finance spokeswoman noted that local SMEs generally have few assets to pledge as collateral for loans, a current requirement; the change will thus offer them more financing options, she said.

Finance companies will be allowed to offer current account and chequing services to their business customers as well, said MAS. They will also be able to join electronic-payment networks such as Inter-bank GIRO, Fast and Secure Transfers (Fast) and Electronic Funds Transfer at Point of Sale, commonly known as Nets. These changes will enable finance companies to provide comprehensive credit and deposit services to SMEs.

However, MAS said it would retain other regulatory restrictions on finance companies, such as restrictions on foreign-currency exposure and derivatives trading. These restrictions will serve to limit finance companies' business risks and encourage them to remain focused on serving the domestic SME market.

To safeguard prudential standards as finance companies grow, MAS will set higher corporate-governance and risk-management standards.

The regulator said: "This will include stricter rules on related-party transactions and limits on exposure to the property sector."

The stricter rules on property-sector exposure to prevent concentration risk could affect loans to property developers, construction companies and investment properties.

Liberalising rules on finance companies is in line with the recommendations by the Committee on the Future Economy (CFE) to help traditional providers morph into innovative firms.

In the US and UK, SME banks and online-lending platforms funded by various sources including equity crowdfunding have been extending loans to SMEs, using intelligent systems to perform credit assessments.

A big player is China's Ant Financial, controlled by Jack Ma, the founder of Alibaba. Ant Financial, which provides small loans to enterprises and individuals, was valued at about US$60 billion after a US$4.5 billion funding round last April, Reuters reported.

Separately, homegrown Funding Societies said it is launching FS Bolt, a mobile application to provide working capital loans to local SMEs. FS Bolt, which uses intelligent systems to include non-traditional datasets in its credit-assessment processes, offers loans of up to S$20,000.

The application process takes two minutes to complete and with automated credit assessment in two hours, disbursement happens within 24 hours - making FS Bolt the quickest source of working capital loans in Singapore, it said.

Launched in 2015, Funding Societies has raised S$40 million - comprising S$10 million from a venture capitalist to start the business and S$30 million via crowdfunding to disburse as SME loans, said co-founder Kelvin Teo. He said he is working with DBS Bank to refer requests for bigger loans to it; in turn, DBS refers requests for small loans to Funding Societies. "I'm open to working with finance companies," said Mr Teo.