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Fintech all set to transform SME financing


THE business sentiment among Singapore's small and medium enterprises (SME) is upbeat, as the country's economy expands and productivity gains start coming in from technology investments.

But there is one nagging issue that is tempering the mood. And that is nothing but an age-old problem: poor cash flow.

Cash flow constraints threaten to hold SMEs back on their growth strategies. Payment delays have a compounding effect on a company's operations, its ability to reinvest in the business and ensure long-term survival.

They are often unable to secure bank financing to tide over payment crises.

However, the emergence of marketplace lending in Singapore promises to ease off much of these troubles.

Marketplace lending is set to transform the way SMEs have sought finances so far. This digital platform driven service opens the door to a wide range of funding opportunities, often for requirements that would not qualify for a bank loan.

In the months ahead, SMEs can expect the local marketplace lending ecosystem to mature even further.

This April, lending platform operators came together to set up the Marketplace Lending Sub-committee under the aegis of Singapore Fintech Association.

We expect the sub-committee to provide thought leadership to take the industry in the right direction, adopt best practices from mature markets around the world and raise awareness about marketplace lending in Singapore.

Lending sub-committee is a big step forward

Since early 2013, marketplace lending in Singapore has grown to about 50 platforms. However, the growth has not kept pace with the market potential.

I have been advocating the need for platform operators to come together to promote our common interests and address our concerns. The sub-committee will provide us that direction.

One of our top focus areas is to manage loan delinquency.

As a first step, the sub-committee is looking at drawing up guidelines on the definition of loan default rates.

The absence of a standardised definition of loan default for marketplace lending platforms or disclosure rules puts investors at risk.

Next on our wish list is a collaborative effort by all platform players to share a blacklist of errant borrowers and brokers. It will be a live 'library' that members can update and access.

Recent reports of fake invoices being sold to investors from a invoice financing platform show that there is an urgent need for platform operators to develop strong risk management practices.

Currently, lending platforms create profiles of SME borrowers based on their repayment behaviour.

One of the risk components is calculated on the basis of the borrower's debt exposure at the time of application processing.

However, this calculation gets skewed if the applicant receives other fresh loans that it had applied for simultaneously.

Since these are unsecured loans, marketplace lending operators may not be able to track disbursals by other players.

In case of any suspicion, platforms today use informal channels to find out if a company has been borrowing too often.

The industry needs to develop more mature ways to share borrowers' data even as we protect the business interests of each platform.

The marketplace lending sub-committee will work towards developing practices to protect operators and investors from financial over-exposure and fraud.

A boon for SMEs

These measures will put the industry on the right path where it can align itself to the needs of the Singapore market.

There is no doubt that there are strong push factors to grow the market.

A report by the DP Information Group in November 2017 says that payment problems of Singapore SMEs outweigh their concerns related to manpower costs.

As many as 35 per cent of SMEs here have finance-related issues, which is a 13 per cent jump in just 12 months and the highest since 2011 when the survey had begun.

The report also noted that the number of SMEs with finance-related issues has more than doubled since 2014.

The major cause seems to be payment delays from customers, which has risen from 14 per cent in 2016 to 81 per cent last year.

This is a big concern area for Singapore where SMEs constitute close to 99 per cent of all businesses, employ two-thirds of the workforce and contribute to about half of the country's GDP.

Marketplace lending is helping SMEs tide over payment delays.

They can now secure funds for reasons that do not qualify for a bank loan including invoice financing and short-term loans.

Recently, we issued a loan of $40,000 for three months to a six-month-old start-up.

A bank would have rejected the loan application since it was a new company and needed only a short-term loan.

However, we offered the loan after conducting extensive due diligence that goes beyond a bank's statutory checklist that would have rejected the application by the age of the company.

Our enquiry showed that the company needed the loan to honour a supply contract it had received from a reputed customer.

Besides the reliability of the customer, we were convinced about the entrepreneurial and managerial capabilities of the company's founder.

Over time, lending operators are developing sophisticated algorithms that run these assessment models. As new data gets fed into the system, the algorithm will become more reliable.

Best practices to grow the market

Currently South-East Asia constitutes a mere one per cent of the global marketplace lending business. What can Singapore adopt from the mature markets of the UK and China?

China, which makes up 85 per cent of the global lending market, has a highly evolved payment infrastructure.

Lending platforms in China use an Application Programming Interface (API) connection to allow an investor to transfer funds directly from her/his bank account through the mobile phone at a minimal cost.

In Singapore, investors need to use cheques or internet banking for transfers, which then needs to be communicated to the platform operator for manual verification.

A better user experience is critical for faster adoption.

We also need to improve market awareness. Platforms in China have garnered support from retail investors with mass education campaigns.

Another welcome move would be a practice like the loan referral scheme for SMEs in the UK.

If an SME does not qualify for a bank loan, it gets referred to marketplace lending platforms.

We welcome the Singapore Government's SME Working Capital Loan, announced in the 2018 Budget, to co-share 50 per cent of the default risk for loans of up to $300,000.

My recommendation would be to enrol local marketplace lending platforms into the scheme to lower the interest burden on SMEs.

Combined efforts by industry players and the government will greatly improve Singapore's lending ecosystem and position us as a regional leader.

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