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Opportunities for the Growth of Financial Services to MSMEs

Opportunities for the Growth of Financial Services to MSMEs.

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Opportunities for the Growth of Financial Services to MSMEs

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  1. Opportunities for the Growth of Financial Services to MSMEs

  2. 1. MSMEs Access to Financial Services - 83 % of Thai population have access from the formal sector - The rest from semi-formal or unorganized sources - Focusing on access to credit :only 43% have access from the formal sector; out of this, only 31% from commercial banks, SFIs, and non-bank financial institutions. The rest from cooperatives and unorganized sources. - Access to credit for MSMEs is a crucial issue, not access to financial services in general.

  3. 2. SMEs Access to Credit - The high growth of the Thai economy since the 1980s has enabled a large number of SMEs to grow rapidly to become large companies. - Their impressive growth has attracted commercial banks to compete for their businesses. The SMEs that lagged behind were either left out or found it more difficult to obtain loans from commercial banks. - The economic crisis of 1997 changed banks’ view on SMEs completely. - Many of the large companies were severely hit by the crisis and had to undergo long restructuring process. - Extensive regulatory and legal reforms following the crisis improved the borrowers’ discipline and creditors’confidence

  4. - As a consequence, well performing SMEs became more attractive for the banks. - At the same time, large companies that fully recovered from the crisis turn to the capital market for funding as an alternative to commercial banks. - Loan approval ratio for SMEs. ● Q4/2009 SMEs approval ratio 24.9%, Overall 31.4% ● Q4/2010 SMEs approval ratio 22.5%, Overall 6.9% ● Q1/2011 SMEs approval ratio 12.0%, Overall 29.4% - Loan performance of SMEs ● Q1/2011 SME NPLs = 5.5%, overall NPLs = 3.9% ● Q1/2011 Commercial banks loan outstanding = THB 8.3 trillion, of which about THB 4 trillion are held by SMEs

  5. - The regulatory and legal reform following the crisis was indeed an important turning point to improve the credit worthiness of the borrowers, large and small: amendment of the insolvency law, the adoption of accounting and reporting standards, the establishment of a credit bureau, etc, are examples of the reform. - Various government supports also help: The establishment of institutes to provide advisory services to SMEs in collaboration with business schools; the promotion of OTOP (one tambon-one product, a program encouraging rural communities to create innovative products), and supporting SMEs to participate in local as well as international trade fairs. - The collateral law, yet to be presented to parliament, will further enhance opportunities for SMEs to gain access to bank credit, as new assets will be recognized by the law as collateral, and creditor rights will be protected more effectively.

  6. Lending to the unbanked groups. - Although the vast majority of the Thai population have access to various financial services, access to credit remains limited.The high economic growth over the past decade has left a huge income gap between the rich and the poor. - Low-income groups are unserved or underserved by social and public services to improve their education, health, skill, and the ability to earn higher income.

  7. - Access to financial services has gained more serious attention from leaders around the world, from G20 to several developing economies. ABAC took the initiative to promote financial inclusion as a development goal. ABAC’s recommendation was accepted and endorsed by APEC finance ministers in 2010. - In 2001, the Thai government launched a Village Fund Scheme to provide micro-credit to the unserved and unbanked rural villagers.

  8. - Through this scheme, village households obtain loans of THB20,000 -50,000 each (USD 1=THB30) to acquire more land, buy new equipment, or start a new business. - But because the scheme wasimplemented in haste, the lending procedures and the financial literacy of the villagers had not been put in place for efficient implementation. Consequently, many borrowers could not pay back and became heavily in debt. - Without a serous effort to educate the village fund managers and the villagers, the sustainability of the fund remains vulnerable.

  9. - New initiatives are put forward by the government to expand credit to the grass-root people: promoting the post service to expand their operation to include granting micro-credit to the underserved groups, relaxing operational practices of commercial bans to encourage their involvement in micro-credit activities. - Commercial banks specializing in retail and consumer lending have shown their interest, but they need level playing field to compete with state-owned infinancial institutions, particularly the Village Fund that enjoy government financial support and are not subject to the same regulations.

  10. - An interest rate cap of 28% is imposed on micro-credit, a regulation that banks feel would impede a flexible market operation. - Commercial banks should be allowed to set up subsidiaries specifically to operate micro-credit business. This would allow the subsidiaries to operate with smaller capital, under similar regulatory requirements as other government-owned institutions. - The Village Fund should be re-invigorated, with improvement in lending procedures, extensive training in financial literacy, including financial management to prevent the villagers from falling into the debt trap.1010

  11. THANK YOU

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