Will Singapore banks regret easy loans for coronavirus-hit businesses?
Derek Wong and Tan Shan Min
In a
coronavirus
-strickenworld,
Singapore
’s loan sharks and licensed moneylenders are feeling the pinch as struggling customers look elsewhere for cheaper credit.
Some loan sharks have been driven to desperation from a lack of business. Bogus advertisements for staff to enforce stay-home orders are actually requests for runners. Hundreds of dollars worth of food deliveries are sent to debtors as harassment.
ValueMax, one of Singapore’s biggest moneylending and pawning chains with over 30 outlets, said it had seen fewer clients borrowing money since the start of the city state’s partial lockdown, termed a “circuit breaker”, on April 7.
A ValueMax spokesman attributed this to government assistance schemes. One such initiative, the MAS (Monetary Authority of Singapore) Singapore Dollar Facility, allows banks to borrow at a near-zero interest rate.
This means banks can reduce the cost of loans to small and medium-sized enterprises (SMEs) and offer an interest rate of between 2 and 4.5 per cent per annum, down from up to 6 per cent previously. In contrast, licensed moneylenders can charge up to 4 per cent monthly interest.
The result has been business owners flocking to apply for the government-backed loans. About 2,500 loans totalling S$1.9 billion (US$1.3 billion) were issued in March and April – six times the credit extended in the same period last year – with a high approval rate of 90 to 95 per cent.
The government has taken on a risk share of 90 per cent of the loans, with banks taking up the remainder.
But with many borrowers likely to close their businesses as the pandemic drags on, the risk of defaults looms large.
A pedestrian crosses a street in Singapore’s deserted central business district. Photo: Bloomberg
TAKING THE HIT
Some business owners do not expect to see a quick recovery. One of them, who wanted to be known only as Peter, is planning to close his 14-year-old events company by the end of June if business does not pick up soon. This does not seem possible, as events which draw crowds of people are not likely to happen for the foreseeable future, even after the circuit breaker measures are eased next in June.
“Totally zero revenue since February. Two office spaces, six vehicles and 25 staff. We are bleeding S$100,000 a month and our reserves are almost dry,” said Peter, who has turned to folding pizza boxes to make ends meet. He recently got married and has to fork out more than S$2,000 a month for his mortgage and car loan.
“Taking a loan is never off the table, but I see no way to pay it back,” he said.
With doomsday scenarios looming for such sectors, loan defaults may take place en masse. Banks are already bracing themselves with billions of dollars’ worth of provisions, resulting in profit drops for Singapore’s three local banks for the first time since 2016. DBS, OCBC and UOB posted declines in year-on- year profits of between 19 and 43 per cent for the first quarter. The government and banks are holding out hope that the economy will bounce back and the loans will be enough to tide SMEs over for this period. But Professor Kim Sun Bae from the National University of Singapore Business School believes this may not work.
“Many governments, including Singapore’s, appear to be making the baseline assumption that businesses are faced with a liquidity problem, not necessarily a solvency problem,” he said.
“The risk of this backfiring clearly is if there is no ‘V-shaped’ recovery but a ‘U-shaped’ one, pushing some borrowers into insolvency.”
WHATEVER IT TAKES
This was why the authorities were using the market to mitigate risk, said Professor Bernard Yeung, president of the Asian Bureau of Finance and Economic Research.
“The government goes through the local banks which have firm-specific information. The co-sharing of risks is to safeguard against overextension. But if the government takes on 100 per cent risk, then it is clearly a case of over-insurance,” he said.
The loans were a risk worth taking to prevent the larger calamity of more businesses collapsing, said CIMB Private Banking economist Song Seng Wun. “There is no choice but for governments and central banks to use the ‘whatever it takes’ approach now, to roll out more and more measures to help as many businesses as possible to get back on their feet through this long, bumpy road,” he said. “Unfortunately, there will be some who bail on the loans, but this is inevitable in any recession.”
The effort was worth it as the potential downsides went beyond mere economics, observed Singapore Management University associate law professor Eugene Tan, a former Nominated Member of Parliament (NMP).
“Should SMEs – which employ the vast majority of Singaporeans – fold, there would be knock-on effects on employees, their families and the economy,” he said. “It’s a ripple effect and the human costs, often untold, are not to be trifled with – in terms of lost opportunity, livelihoods, personal and family well-being.”
For now, it may be better to err on the side of saving more businesses, believes economist and NMP Walter Theseira, although he warned that more care may have to be shown in follow-on lending, or lending to sectors which are structurally affected by Covid-19.
Nonetheless, he said Singapore’s banks were well-capitalised and regulated enough. “It is not plausible that the bad loans in this programme are so large as to threaten banking viability. Banks have made provision for far greater losses already in the context of the Hin Leong collapse, those losses are not supported by the government, and nobody thinks that the Singapore banks are unable to bear the loss,” he said, referring to the three local banks that had more than S$871.5 million combined exposure to Hin Leong. ■
- Struggling businesses have taken out 2,500 loans since March, with the Singapore government taking on a risk share of 90 per cent and banks the rest
- But as the Covid-19 pandemic drags on, the risk of default looms large, even as local banks DBS, OCBC and UOB have already seen their profits drop
Derek Wong and Tan Shan Min
In a
coronavirus
-strickenworld,
Singapore
’s loan sharks and licensed moneylenders are feeling the pinch as struggling customers look elsewhere for cheaper credit.
Some loan sharks have been driven to desperation from a lack of business. Bogus advertisements for staff to enforce stay-home orders are actually requests for runners. Hundreds of dollars worth of food deliveries are sent to debtors as harassment.
ValueMax, one of Singapore’s biggest moneylending and pawning chains with over 30 outlets, said it had seen fewer clients borrowing money since the start of the city state’s partial lockdown, termed a “circuit breaker”, on April 7.
A ValueMax spokesman attributed this to government assistance schemes. One such initiative, the MAS (Monetary Authority of Singapore) Singapore Dollar Facility, allows banks to borrow at a near-zero interest rate.
This means banks can reduce the cost of loans to small and medium-sized enterprises (SMEs) and offer an interest rate of between 2 and 4.5 per cent per annum, down from up to 6 per cent previously. In contrast, licensed moneylenders can charge up to 4 per cent monthly interest.
The result has been business owners flocking to apply for the government-backed loans. About 2,500 loans totalling S$1.9 billion (US$1.3 billion) were issued in March and April – six times the credit extended in the same period last year – with a high approval rate of 90 to 95 per cent.
The government has taken on a risk share of 90 per cent of the loans, with banks taking up the remainder.
But with many borrowers likely to close their businesses as the pandemic drags on, the risk of defaults looms large.
A pedestrian crosses a street in Singapore’s deserted central business district. Photo: Bloomberg
TAKING THE HIT
Some business owners do not expect to see a quick recovery. One of them, who wanted to be known only as Peter, is planning to close his 14-year-old events company by the end of June if business does not pick up soon. This does not seem possible, as events which draw crowds of people are not likely to happen for the foreseeable future, even after the circuit breaker measures are eased next in June.
“Totally zero revenue since February. Two office spaces, six vehicles and 25 staff. We are bleeding S$100,000 a month and our reserves are almost dry,” said Peter, who has turned to folding pizza boxes to make ends meet. He recently got married and has to fork out more than S$2,000 a month for his mortgage and car loan.
“Taking a loan is never off the table, but I see no way to pay it back,” he said.
With doomsday scenarios looming for such sectors, loan defaults may take place en masse. Banks are already bracing themselves with billions of dollars’ worth of provisions, resulting in profit drops for Singapore’s three local banks for the first time since 2016. DBS, OCBC and UOB posted declines in year-on- year profits of between 19 and 43 per cent for the first quarter. The government and banks are holding out hope that the economy will bounce back and the loans will be enough to tide SMEs over for this period. But Professor Kim Sun Bae from the National University of Singapore Business School believes this may not work.
“Many governments, including Singapore’s, appear to be making the baseline assumption that businesses are faced with a liquidity problem, not necessarily a solvency problem,” he said.
“The risk of this backfiring clearly is if there is no ‘V-shaped’ recovery but a ‘U-shaped’ one, pushing some borrowers into insolvency.”
WHATEVER IT TAKES
This was why the authorities were using the market to mitigate risk, said Professor Bernard Yeung, president of the Asian Bureau of Finance and Economic Research.
“The government goes through the local banks which have firm-specific information. The co-sharing of risks is to safeguard against overextension. But if the government takes on 100 per cent risk, then it is clearly a case of over-insurance,” he said.
The loans were a risk worth taking to prevent the larger calamity of more businesses collapsing, said CIMB Private Banking economist Song Seng Wun. “There is no choice but for governments and central banks to use the ‘whatever it takes’ approach now, to roll out more and more measures to help as many businesses as possible to get back on their feet through this long, bumpy road,” he said. “Unfortunately, there will be some who bail on the loans, but this is inevitable in any recession.”
The effort was worth it as the potential downsides went beyond mere economics, observed Singapore Management University associate law professor Eugene Tan, a former Nominated Member of Parliament (NMP).
“Should SMEs – which employ the vast majority of Singaporeans – fold, there would be knock-on effects on employees, their families and the economy,” he said. “It’s a ripple effect and the human costs, often untold, are not to be trifled with – in terms of lost opportunity, livelihoods, personal and family well-being.”
For now, it may be better to err on the side of saving more businesses, believes economist and NMP Walter Theseira, although he warned that more care may have to be shown in follow-on lending, or lending to sectors which are structurally affected by Covid-19.
Nonetheless, he said Singapore’s banks were well-capitalised and regulated enough. “It is not plausible that the bad loans in this programme are so large as to threaten banking viability. Banks have made provision for far greater losses already in the context of the Hin Leong collapse, those losses are not supported by the government, and nobody thinks that the Singapore banks are unable to bear the loss,” he said, referring to the three local banks that had more than S$871.5 million combined exposure to Hin Leong. ■
