Singapore firms in aviation, construction struggle to get loans amid credit tightening

A view of the central business district in Singapore May 24, 2018.
PHOTO: Reuters

As Singapore’s economy continues to reel from the impact of Covid-19, a lifeline for companies in the worst-hit business sectors is starting to dry up.

Despite a government pledge to backstop bridging loans - credit extended to companies to tide them over during difficult periods - companies in ailing industries such as aviation and construction are finding it harder to get funds.

While such loans were disbursed more freely earlier in the year amid strong government support and a low-interest-rate environment, banks have tightened the purse strings in recent months as the pandemic drags on.

Loan brokers, which help companies secure credit from banks, have noted a stark contrast in loan approvals during Singapore’s circuit breaker (or lockdown) in April and May, and after.

Lenny Lim, executive director of loan broker Beacon Financial Services, said the lockdown was, in fact, the “best period” to get loans, with clients in sectors such as construction, tourism and events seeing an approval rate of more than 90 per cent.

But after the circuit breaker, the approval rate in these industries fell to between 20 and 55 per cent.

“Even if your bank balances are strong but you are in these industries, the bank may not take the risk and approve the loan,” Lim said. “The screws have been tightened.”

He added that one of the recent loan criteria imposed by a local bank was for businesses to have a $10,000 balance in closing statements for six consecutive months. “If I look at my customer list, about 30 per cent out of the 400 to 500 firms will be affected,” he said.

Loans in decline

Central bank data also shows that domestic loans to businesses peaked in March and May, averaging about $433 billion in loans made. In August, the figure had fallen to $422 billion.

The decrease is partly the result of companies no longer requiring funding, but Benjamin Teo, a spokesman from business loan consultancy Linkflow Capital, believes it is also the result of banks pulling back on credit.

He noted that Linkflow, which runs a loan comparison web portal frequented by thousands of small and medium-sized enterprises (SMEs) in Singapore, saw an approval rate of about 90 per cent across all sectors in the first half of the year.

This has dropped to about 80 per cent in the second half, and Teo foresees the average loan amount approved for businesses to continue falling, especially for smaller SMEs.

“It’s been a tale of two halves,” he said.

Teo added that bank credit has especially tightened for the worst-hit industries, including retail, construction, aerospace and events.

“Some banks might place a total stop on lending to SMEs in these industries due to perceived high risk,” he said.

But these companies are the ones most in need of fresh funding.

Kesavan Sathyamoorthy, CEO of construction firm Diamond Glass, said banks “are looking at our cash flow reports, performance and jobs in hand before deciding if they can extend a loan to sustain the company.”

The Monetary Authority of Singapore building.
PHOTO: Reuters

He added that while his company has enough reserves, many others in the sector are not able to secure loans mainly due to the absence or postponement of jobs, as construction projects have seen massive disruptions in the country due to a wave of infections in the foreign worker population.

In April, the government increased its risk share of loans to 90 per cent under several loan financing schemes, in addition to low-cost funding provided by Singapore’s central bank – the Monetary Authority of Singapore (MAS) – for certain SME loans.

Earlier this month, MAS also extended financial relief measures, allowing borrowers to defer repayments for various bank loans until the end of the year.

Alternative Financing 

In responses to queries on whether loan criteria had been tightened, United Overseas Bank (UOB) said there had been no such change.

Its head of group commercial banking, Eric Tham, said UOB would continue providing clients loan moratoria – when a borrower is not obliged to make payments – on existing secured loans, and also help them tap funding through government-assisted schemes.

“We have also stepped up our support for companies from hard-hit sectors such as construction,” he said, adding that UOB is working with contractors and project owners to help subcontractors and suppliers obtain loans under value-chain financing.

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Singapore’s other two local banks, DBS and OCBC, did not comment on lending criteria, but said they were helping SMEs to digitalise to improve their businesses, among other things.

Amid gripes from SMEs that have been unsuccessful in obtaining loans, banks still have to ensure that most of their loans do not go sour.

“At the end of the day, banks are for-profit entities that have stakeholders to answer to, and they have a corporate responsibility to keep non-performing loans to an acceptable standard,” said Linkflow’s Teo.

According to Bloomberg, UOB, DBS and OCBC set aside $4 billion in provisions for general and problem loans for the first half of the year.

As a result, they reported sharp falls in second-quarter year-on-year net profits, with DBS posting a 22 per cent drop and UOB and OCBC both seeing 40 per cent decreases.

This article was first published in South China Morning Post.