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D.1. Globally, the most serious immediate problem is the credit crunch. What we are seeing is a level of risk aversion that has gone well beyond what happens in normal downturns.
D.2. This is a systemic problem and requires a systemic solution. This is why governments all over the world are trying to find solutions to free up credit.
D.3. The approach taken in some of the developed economies where banks have suffered large write-downs on their assets has been to partially nationalise financial institutions by injecting government capital. However, these measures have so far not succeeded in unfreezing the credit markets.
D.4. The Government has not had to bail out Singapore banks. They are already well-capitalised and have no lack of liquidity available to them. Singapore banks are also not burdened with toxic assets. Their non-performing loans are low at about 1%.
D.5. The credit situation in Singapore held fairly steady until October but loans have begun to decline since then. A decline in credit occurs in every recession both because the demand for credit goes down, and because banks become more cautious over the prospects of loan recovery. However this time we have to expect a more severe contraction if nothing is done. Firstly, several of the foreign banks, especially those with weak balance sheets globally, have been focusing on recapitalisation in their head offices. Secondly, even the stronger players, including our local banks, have taken a step back to reassess their lending strategies because of the uncertainty over the depth and duration of this recession.
Special Risk-Sharing Initiative (SRI)
D.6. We therefore have to do more to avoid a situation where good and viable companies are unable to get the funding they need to stay afloat and grow.
D.7. The Government has therefore decided to take on a significant share of the risks of bank lending. However, we will not take over the lending business ourselves. The credit decisions are best made by the banks themselves because they are the ones who have the direct relationships with their customers and a close understanding of their businesses. They also have the expertise in credit assessment across a wide range of businesses that the Government does not possess.
D.8. In November 2008, the Government announced enhancements to our SME loan schemes. In particular, we enhanced the Local Enterprise Finance Scheme (LEFS) and Micro Loan Programme (MLP) to increase the government share of risk to 80%. We also introduced a Bridging Loan Programme for working capital loans, with the Government taking 50% of the risk.
D.9. It is too early to assess how effective these enhancements will be. However, since the introduction of these enhancements, there has been significant increase in applications by firms and approvals by the banks.
D.10. We will now move to extend Government support to a broader segment of the credit market besides the SMEs. We want to help other viable companies, especially the mid-sized ones, who do not have significant internal sources of funding and need access to credit to sustain their operations. Further, the Government will for the first time, share in the risks of trade financing.
D.11. We will do this under a new, Special Risk-Sharing Initiative (SRI). It will have two components, as follows.
The New Bridging Loan Programme
D.12. First, we will introduce a new Bridging Loan Programme (BLP), that will be substantially enhanced from the scheme introduced in November. The new BLP will cater to loans of up to $5 million (up from $500,000 currently), which will meet the working capital needs of most mid-sized firms, and also some of the larger ones. We will also increase the Government’s share of risk on these loans from 50% to 80%. Further, the new BLP will enable banks to set their own interest rates. This will allow higher-risk borrowers to still gain access to credit, even if it is at a higher interest rate. However, with the Government taking the bulk of the risk, I am sure that the banks will be fair and price their loans reasonably.
D.13. The new BLP will apply to all new loans from 1 February 2009, and will include refinancing of existing loans when they fall due. The scheme will be in operation for one year in the first instance and cater to loans of up to four years maturity. We welcome all licensed banks in Singapore to participate in the programme.
Trade financing
D.14. Second, the Government will take on a significant part of the risk in trade financing. This is an important dimension for companies that already have orders. They need loans to fulfill their orders as well as insurance against the risk of their buyers defaulting on payments.
D.15. The current trade financing schemes are working well but face constraints because of the limited private insurance capacity and a reduced risk appetite in the industry. Mid-sized and large exporters have had difficulty obtaining loans on the scale they need.
D.16. To address the situation, the Government will step in to share the risk for trade financing, including 75% for trade loans. Further details of enhanced and new loan schemes are set out in Annex B ( 50kb) and will be elaborated upon by MTI shortly.
D.17. Besides the SRI, I will extend the tax deduction on loss provisions made pursuant to Monetary Authority of Singapore (MAS) Notice 612 for banks, as well as other equivalent MAS notices for finance companies and merchant banks, for three Years of Assessment. This will encourage banks to continue making adequate loan impairment provisions and bolster their financial strength to underpin continued lending in the downturn.
Government providing unprecedented support; banks should play their part
D.18. The programmes under the SRI will be in operation for a year but with possible extension for another year if the situation warrants. We estimate that this and other enhancements the Government is making could lead to $11 billion of loans this year. (This includes $5.8 billion of government capital.)
D.19. This is a major move by the Government. We had previously only taken on the risk of lending for secured loans to SMEs. We are now taking on substantially more risk including on loans to larger corporate players and on unsecured loans. We have to expect that there will be a cost on the government budget because not every loan will be recovered. But it is the right thing for Government to intervene in this fashion to help viable companies through this crisis so that they can keep jobs and prepare for the upturn.
D.20. The banks have in fact fed back to us that these Government measures to share a large portion of the risk will make a difference. The Government indeed expects that the banks will take advantage of these schemes, and play their responsible part to ensure that viable companies continue to get the funding they need to see them through the crisis.
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