Special Report: ‘Banks risk losing SMEs to alternative lenders’

This article first appeared in The Edge Malaysia Weekly, on May 9, 2022 - May 15, 2022.
Special Report: ‘Banks risk losing SMEs to alternative lenders’
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BANKS need to step up their digital game or risk losing small and medium enterprises (SMEs) to alternative lenders, according to US-based data analytics firm FICO.

Its recent survey of SMEs in Asia-Pacific found that 44% of respondents in Malaysia were interested in taking up new borrowing products this year, while 43% were considering alternative or non-traditional lenders. Interestingly, the latter result was higher than the regional average (39%), with only Indonesia (44%) topping it.

The survey results may be a wake-up call for banks, many of which have growth strategies that involve expanding their SME business. AMMB Holdings Bhd and Alliance Bank Malaysia Bhd, in particular, have a strong focus on growing this segment.

Aashish Sharma, a Singapore-based official with FICO, notes that Malaysian SMEs have made it clear that they require financial support this year but are less optimistic about getting it from their main banks. He says 17% of respondents anticipate further challenges with access to funding this year.

“You can see from the survey that both Malaysia and Indonesia have indicated a high potential to shift to or go for alternative lending options. The sentiment [among respondents] seems to suggest that access to funds is not going to be easily available, so that is probably one of the drivers behind them looking at alternative access to funds,” Sharma, senior director of decision management solutions for Asia-Pacific at FICO, tells The Edge in an interview.

“Second, we note that fintech firms, in particular, have responded well to digital transformation from a consumer or retail lending point of view. So, the gap between the retail and SME lending journeys has widened.

“Clearly, SMEs are wondering if fintech players can achieve the same in SME lending as they have for retail lending. That is probably also a reason why [they would consider alternative options].”

The survey, based on research conducted by the SME Banking Council, was done in the second half of last year in six markets, involving 4,700 SMEs that have an annual turnover of up to US$10 million. Of the survey respondents, 1,044 were based in Malaysia.

Asked if SMEs have taken into consideration the possibility that alternative lenders such as fintech players or digital banks could charge higher interest rates than traditional banks, Sharma says that in some cases, SMEs need quick access to funds, even if it means paying a higher rate.

“When traditional banks assess SMEs, one of the key reasons for the long delays and processes is the lack of reliable information or data from SMEs. So while fintech firms are actually addressing some of these needs [by using data analytics], they’re very niche players — they are targeting a particular segment,” he points out.

“And while the funds may come at higher rates, the players are actually able to deliver. Some SMEs, especially during the Covid-19 pandemic, need funds quickly, even if at a higher rate, as their key challenge has been to keep afloat, to keep the business running.”

Interestingly though, the survey indicates that the top three things that Malaysian SMEs want from a loan provider is competitive interest rates, followed by ease and speed of the application process and flexibility in repayment options. “The whole point of this survey is that SMEs are demanding much better terms and faster turnaround from banks,” Sharma remarks.

This could be an opportunity for the newly licensed digital banks in the country. On April 29, Bank Negara Malaysia announced five successful applicants for the digital bank licences it was issuing. These players are expected to focus on underserved segments such as SMEs, micro enterprises and the bottom 40% income group.

Sharma goes on to say that if traditional banks are to experience continued and sustainable growth in their SME business, they must simplify the application process and improve transparency as well as the customer experience. To do that, they will need to take digital transformation seriously.

He acknowledges that most Malaysian banks, especially the larger ones, have already embarked on digital transformation. For some, that journey started many years ago. Some are already onboarding SME customers digitally. However, there is an important factor to consider, he notes.

“It may sound like a cliché, but the banks have to put the SME consumer in focus. By this, I mean they should be asking: How is the digital journey effective for the SME? Are they getting the funds quicker? Are they getting the funds at a better or more competitive rate? Are they getting better and more flexible terms?

“These are the top considerations for SMEs. So, banks need to think about how any of their investments in digital transformation actually results in benefits for SMEs.

“The great thing is that traditional banks already have the data needed to deliver personalised and faster decisions for their SME customers. Now, it is really just about looking into the right analytics and decision technology that can bring all this together.”

The survey found that 70% of the SME respondents in Asia-Pacific were less than satisfied with the access to credit provided by their main bank. “The pandemic put a sudden and massive burden on SMEs globally, and they didn’t think banks were doing enough to help them,” says Sharma.

Better support from banks despite pandemic

To be fair, banks in Malaysia have extended various forms of help to SMEs, including loan repayment assistance and moratoriums since the pandemic hit.

Earlier this year, in its latest initiative, Bank Negara introduced two facilities amounting to RM2 billion under the central bank’s fund for SMEs, for which they could apply directly from participating banks.

Thanks to such support, SMEs are now able to get loans more easily and at a better rate than at the start of the pandemic in 2020, says SME Association of Malaysia president Ding Hong Sing. “It’s now easier to borrow … not the same as two years ago when [lending] was very tight,” he tells The Edge.

As for whether SMEs are keen on what alternative lenders such as digital banks have to offer, Ding says, “I think our members will go for what is lower [in terms of rates] and is more convenient. Right now, the banks are not making it as difficult as it was two years ago.”

Bank Negara, in its Financial Stability Review for the second half of 2021, notes that new applications by SMEs for a rescheduling and restructuring (R&R) of financing had come down from their peak in July 2021, signalling greater confidence among SMEs of their ability to service their debts. Monthly R&R applications had normalised to early 2021 levels of less than 5,000 from 50,000 in July that year.

Nevertheless, the share of SMEs under repayment assistance remained high at 36.5% of bank and development financial institution loans to the segment, compared with 17.7% among non-SMEs and 24.6% among all businesses.


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