Implementation of Basel III ruling won’t lead to expensive loans to the sector
Credit Guarantee Corp Malaysia Bhd (CGC) said the Basel III ruling would not have a major impact on the cost of borrowings for small and medium enterprises (SMEs) despite the contrary views of some analysts and industry observers that it could potentially lead to expensive loans to the sector.
Managing director Datuk Wan Azhar Wan Ahmad said that generally, with CGC providing guarantees to loans for SMEs, the overall cost of borrowing, in fact, would be reduced.
“It is also expected that not only would the CGC guarantee enable the banks to mitigate their credit risk, but it would also allow them to lower the cost of borrowing by leveraging on the 20% risk weight accorded on the guaranteed portion of the loans.
“Therefore, it is our view that despite the implementation of Basel III, the cost of borrowing for SMEs would continue to be reasonable and affordable. With banks remaining competitive in SME financing, it can be expected that market forces would influence the ultimate borrowing cost for the SMEs,” he told StarBizWeek in an e-mail reply.
Basel III, which has been implemented in stages beginning this year, requires banks to have stronger capital positions to better meet risks.
Wan Azhar said there were other initiatives which CGC had embarked on to mitigate the cost of borrowings of SME loans.
The risk-adjusted-pricing, introduced by CGC and universally used by financial institutions, allowed pricing to be conducted according to the risk rating of a borrower, he said, adding that the mechanism enabled a low-risk borrower to enjoy lower guarantee fees.
CGC had also, in collaboration with financial institutions, introduced the “blended rate formula” – a more “flexible” interest rate formula for the guaranteed portion that is favourable to the borrowers.
“This is basically to recognise that the loan is ‘collateralised’ with CGC’s guarantee (which is paid for by the borrower), and as such, the risk for the banks is very much mitigated. With that in place, the participating banks charge lower interest rates for loans with higher guarantee cover,” he said.
Under its Credit Rating System, he said borrowers were rated using CGC’s internal scoring system, which allows it to rate borrowers more accurately. This, in turn, allows CGC to charge guarantee fees more accurately.
To improve its service level of financing to SMEs, CGC in partnering with participating financial institutions, has introduced a portfolio guarantee scheme. Unlike a normal guarantee scheme whereby application is via singular application, the scheme is a highly customisable product, whereby all eligibility criteria and product features are mutually agreed upon between CGC and the financial institutions.
Under the scheme, based on a pre-determined set of criteria, financial institutions couldavail a fixed guarantee cover percentage for the amount that is agreed upon, he said, noting that with this, they could have greater certainty in the guarantee provided when granting loans to SMEs.
According to Wan Azhar, the setting up of Credit Bureau Malaysia as the premier provider of comprehensive and reliable information and ratings in the country had helped SMEs improve their credibility and bankability.
The credit bureau, among others, would benefit lenders in terms of enhanced process efficiency and cost savings, translating into a lower cost of loan processing and faster approvals for SME borrowers.