The global credit crunch doesn’t seem to have had much of an impact on Asia’s corporate borrowers.
Except for some property developers finding it hard to close the financing for new projects, the rest have had it easy.
Sure, PT Mobile-8 Telecom Tbk, an Indonesian mobile-phone operator, had to scale back the size of its dollar-bond sale to $100 million (Rs394 crore) from $150 million in August.
There was also a hiccup or two in raising debt financing for cross-border buyouts.
India’s Tata Steel Ltd, purchasing its British rival Corus Group Plc. for $12.9 billion, had to rely on State Bank of India to fill a $1 billion financing gap that suddenly emerged when the leveraged-loan market seized up, raising borrowing costs.
Credit evaluation is stable for more than four-fifths of the companies rated by Moody’s Investors Service in the Asia-Pacific region, excluding Japan.
However, for one important category of Asian corporate borrowers—small businesses—the going has become a little tougher in the past few months.
According to Ed Ng, chief executive of GE Commercial Finance in South-East Asia, small- and mid-sized enterprises in Singapore are now borrowing at rates that are between 250 basis points and 350 basis points above the London Interbank Offered Rate (Libor).
Before the seizures in the global credit markets, these loans were as cheap as 200 basis points above Libor.
“Banks used to be very aggressive in lending to small and medium enterprises before the credit crunch,” Ng had said in a recent interview. “Pricing has edged up since then.”
Slightly costlier credit isn’t a major source of concern in booming Asian economies. What small firms in Asia have to contend with is another—more permanent—credit squeeze.
Banks in most Asian countries remain flush with depositors’ money. And that has kept them largely insulated from the kind of risks that plagued Northern Rock Plc., the troubled UK bank, and Countrywide Financial Corp., the biggest US mortgage lender, which were excessively dependent on short-term money markets for raising funds.
Asian banks, liquid as they are, still aren’t able to do a good job of lending to small companies. Sure, they have been offering a competitive—even unrealistically low—interest rate. That isn’t enough.
“Our message to companies has always been: Don’t look at the pricing alone,” says GE Commercial’s Ng. “In a competitive marketplace, banks may give you a low price. But they take all your collateral—liens on your property, accounts receivable, inventory, everything. All your assets are tied up.”
Many banks tend to view their small-business customers as the top end of consumer finance. That’s a wrong approach. Credit-scoring techniques that work well in consumer finance—auto loans and mortgages—tend to break down when applied to small businesses.
In the US, one hip, new source of money is “social credit” of the type extended by Prosper Marketplace Inc.
A Web-based service, Prosper allows individual lenders to compete with one another to offer reasonably priced credit to individuals who want to retire high-cost personal debt or want to start a small business. The amount for a single loan is capped at $25,000, though bids are often as tiny as $50.
Prosper and LendingClub.com will take a long time to take off in Asia, even though informal lending networks, which are often exploitative, thrive in villages and towns of countries such as Indonesia and India.
To get credit going to deserving borrowers, Asia needs to get the basics right.?
In member?countries of the Organization for Economic Cooperation and Development, 59% of the adult population is covered by private credit bureaus; the corresponding figure for South Asia is 1.9%, lower than even in sub-Saharan Africa, according to the World Bank.
The Bank’s most recent “Doing Business” survey notes that 500 million individuals and 10 million firms are covered by the public credit registry in China.
However, Chinese law insists on a specific—rather than general—description of assets in collateral agreements. That’s a considerable obstacle to working-capital financing.
When a bank doesn’t have a strong, enforceable right on the collateral, it tends to seek compensation for the credit risk by securing as many of the borrower’s assets as it can.
Small businesses that can afford to pay higher rates fail to borrow more as they run out of assets to pledge.
It is this credit crunch that small companies in Asia really worry about; the other squeeze—the one that’s hogging all the media headlines—is merely making interest rates rise a little. Compared with that, being shut out of markets prematurely is a far bigger handicap.
Respond to this column by writing to firstname.lastname@example.org