Bangkok--13 Aug--Spark Communications
Challenges include strict regulations, inadequate financial infrastructure, poor distribution channels and stringent credit risk models
Most small and medium-sized enterprises (SMEs) in Thailand, as well as other ASEAN countries, have limited access to financing, even though they are critical drivers of national growth and employment, says a joint Deloitte-Visa report titled Digital banking for small and medium-sized enterprises: Improving access to finance for the underserved[1]
The report finds a significant proportion of SMEs in Thailand have no access to financial institutions and require external financing. To finance investments, most of the SMEs use their own savings (90%) or borrow from family and friends (62%). 58% of SMEs are not eligible to borrow from financial institutions and 17% of SMEs view access to finance as a major barrier.
"As key contributors to their countries' economies, SMEs should be a priority market for stakeholders such as the government, regulators, financial institutions and non-bank financial institutions. Difficulties with access to financial facilities and export markets hinder SME development in the region," said Mohit Mehrotra, Executive Director, Deloitte Consulting.
"SMEs need adequate cash flow for investment, and continual improvement of operational efficiency and productivity. Without adequate financing, SMEs will not be able to build competitiveness and resilience, innovate and be sustainable in today's competitive climate."
Prashant Aggarwal, Visa's Head of Commercial Products for Southeast Asia said: "Currently there are major disruptive forces at play in the market, notably the rise of peer-to-peer lending, use of credit card transaction data for risk underwriting and use of technology to streamline supply chain financing. These are opportunities for banks, together in cooperation with government, regulators and policy makers, to provide the right solutions and innovation to this underserved market."
With SMEs playing a key role in ASEAN economies, ASEAN governments have increasingly focused on developing the SME sector through various schemes, initiatives and policies. However, the current state of SME financing in ASEAN remains a sizeable gap for banks and financial institutions to fill and presents opportunities for them to serve.
The report examines SMEs across the five big economies in the ASEAN region – Indonesia, Malaysia, Philippines, Singapore and Thailand. SMEs in these five countries collectively contribute 30% to 60% of GDP and employ 60% to 90% of the workforce. Yet, according to the report, less than 60% of the SMEs across all five countries have access to bank loans as a means of financing, with personal funds continuing to be a dominant source.
The solutions that banks in the five countries offer do not address SMEs needs completely, evident in how half of the SMEs in the region are still unserved and underserved. As a result, SME loan volumes are less than 60% of the SMEs' contribution to GDP, and constitute less than 20% of total loans.
Key factors that impede SME lending and result in the poor financial inclusion of SMEs across the five countries include:
Stringent lending regulations. For example: Basel III dictates greater risk weights to be assigned for SME loans
Inadequate financial infrastructure, such as the lack of government funding and credit guarantees, deprives SMEs of low-cost alternative funding
Poor distribution infrastructure alienates SMEs in the rural regions and limits banks' outreach, forcing unbanked SMEs into alternative funding sources
Collateral-based credit risk models, such as strict variables used to assess credit risk, prevent banks from lending sufficient funds to SMEs
Thailand: opportunities and challenges
SMEs account for 37% of Thailand's GDP and employ more than 80% of the country's workforce. Thailand's SMEs are mainly concentrated in Bangkok, and 70% of them are less than ten years old.
After adjusting for the size of the economy and SME's contribution to GDP, Thailand leads the region in the domain of SME lending. Total SME loan volume for 2014 was US$171 billion, compared to Singapore's US$57 billion.[2] Despite the scale, there are challenges faced by SMEs in Thailand. Financial challenges are:
Lack of information and advice from financial institutions
High degree of complexity and inconvenience related to the loan application process
Inadequate qualifications
High expenses, fees and interest rates charged
Lack of collateral
Non-financial challenges include:
Rising labour costs
Political instability
Lack of technology and infrastructure
High production cost
Low purchasing power
Lack of understanding of the impacts of the upcoming ASEAN Economic Community (AEC) integration and how SMEs can successfully compete in home market.
Seizing the opportunities to target the SME market
The challenges for SMEs in ASEAN are not new – they were also prevalent in advanced economies such as the countries that are part of the European Union. To overcome these challenges, particularly factors limiting SME lending, these countries have adopted innovative business solutions to address SMEs' varied financial and non-financial needs.
With the digital revolution, incumbent banks and financial institutions in the ASEAN region can also develop new business models which may involve leveraging on digital solutions providers and/or form strategic partnerships with challenger banks, FinTechs and e-commerce providers to target the SME market in unconventional ways. For example, they could finance SMEs through alternative channels; use payment data to supplement credit risk models; capitalise on digital infrastructure to extend outreach; and offer a comprehensive suite of products and services.
With the AEC integration nearing completion at the end of 2015, SMEs in the region will be exposed to further liberalised trade and investment, which will result in them facing an increasing variety of issues. And yet, it is crucial for SMEs to perform consistently in an efficient and productive manner and they will need help from financial institutions to further develop, grow and achieve sustainability in the market.
To capitalise on this opportunity, banks in the region have to think about the role they want to play in the SME banking space, and explore their options to either organically build out capabilities, or import capabilities by forming strategic partnerships.