Observers say CGC's Enhancer Express loan facility can be improved.

A NEW financing scheme for small and medium enterprises (SMEs) has drawn mixed reactions. While observers recognise that the scheme is a good initiative, they say there is room for improvement.

Koong ... ‘CGC should top up the RM100mil financing amount to benefit more SMEs.’

Credit Guarantee Corp Malaysia Bhd (CGC) has allocated RM100mil of financing for SMEs under a newly-launched credit guarantee scheme called Enhancer Express. The scheme is aimed at promoting the growth and development of SMEs, particularly those in the wholesale and retail sectors, and is available at financial institutions throughout the country for a limited period of three months or until loan approvals hit RM100mil, whichever comes first.

It said: “Enhancer Express offers loan ranging from RM50,000 to RM100,000. The loans are offered to small businesses that have been in operation for more than three years.”

Under the scheme, borrowers will enjoy a fixed guarantee fee of 4.5% per annum, which is relatively lower compared with a maximum fee of 5.75% for other CGC schemes. The guarantee fees are calculated based on the borrowers' individual risk profiles.

According to CGC, the lending rate for Enhancer Express will depend on the financial institutions, but the maximum rate would be BLR (base lending rate) plus 1.75%, on top of the fixed guarantee fee of 4.5% per annum. The guarantee cover for the scheme is at 70% by CGC.

CGC managing director Datuk Wan Azhar Wan Ahmad says: “The Enhancer Express was designed specifically to expand our SME outreach by improving on our turnaround time for loan processing and approvals. To achieve that, we have simplified the documents required by both the financial institutions and CGC.“By aligning with the industry practice, we expect to further improve on our processing and approval time, which will translate into speedier disbursement of funds to the borrowers.”

He further emphasises that the introduction of Enhancer Express is in line with the Government's initiative to support small businesses towards financial inclusion within the economy, thus enabling this critical segment to develop in tandem with other business segments of the economy.

“With attractive features that are beneficial to the financial institutions as well, we are also looking forward to their greater participation in the Enhancer Express scheme to further promote the development of the small business community,” he adds.

CGC, a subsidiary of Bank Negara, provides credit enhancement services to SMEs with inadequate collateral or without collateral and which has no track record. It has cumulatively guaranteed about RM47bil to more than 400,000 SMEs in the country.

Associated Chinese Chambers of Commerce and Industry Malaysia SMEs deputy chairman Koong Lin Loong says it is a good scheme that SMEs can consider applying for. However, the response will be based on the lending rates because the SMEs' margins are very tiny.

To him, a guarantee cover of between 70% and 80% is reasonable for the scheme. He adds that the tenure of the loan is also important and a payment period of between five to seven years is still manageable for SMEs.

“CGC should top up the RM100mil financing amount to benefit more SMEs, and the loan should be opened for all sectors and not just limited to wholesale and retail sectors. Other sectors, such as manufacturing, construction and services, are also contributing to gross domestic product significantly,” he argues.

Koong says if the qualified SMEs are entitled for a minimum loan of RM50,000, the RM100mil can only benefit 2,000 SMEs. Thus, he reckons that the total loan amount should be increased. However, he acknowledges that Enhancher Express is a good initiative.

Meanwhile, SMI Association of Malaysia national president Chua Tiam Wee says CGC's new financing scheme is not that exciting as the net rate to be borne by the SME will still be high. “Taking into consideration the base lending rate at 6.3% plus 1.5% to 2% lending rate, and the additional CGC fixed fees of 4.5%, the overall cost of borrowing under Enhancer Express is expected to be in region of 12.3% to 12.8%.

“Any borrowing cost above 12% will be burdensome under the current business environment. Retailers now face rises in the cost of goods, and are facing constraints in passing the cost increase to consumers due to price controls and competition from hypermarkets,” he says. He adds although the fixed rate of 4.5% appear to be reduced from the maximum rate that can be charged of 5.75%, it will not benefit those SME borrowers who are good paymasters. As such, Chua contends that those SME borrowers who settle loan promptly should be given rebates to reduce the guarantee fees to between 2.5% and 3%. According to him, prior to the hike in guarantee fee rates by CGC to a maximum 5.75% in mid 2010, the maximum rate was only 3.5%. Chua says the the RM100mil allocated under this scheme is modest and is expected to benefit only 1,000 to 2,000 SMEs in the wholesale and retail sector. Nevertheless, it will be helpful as SMEs in this sector account for almost 45% of the total SMEs in the country.

He thinks that the requirement for a minimum three-year track record should be reviewed because the newer SMEs are the ones requiring help from CGC as banks are reluctant to lend to them. “CGC should play a more active nation-building role, for which it was originally set up for, by helping SMEs who lack collateral,” he says.

Reducing the CGC approval time with simplified forms is welcome, he adds. However, the association proposes further simplification of the application process by using a single form for submission to the bank and CGC as against having to fill two different forms and going through two different approving authorities.

“Merging the application process with a single approval authority will save time. Also a common standardised loan application form with a single application window will ease further the application process,” he says.