Tan Kin Lian's Blog: Lending to small businesses

Tuesday, November 24, 2009

Lending to small businesses

During the financial crisis, banks withdrew credit to small businesses, as they do not wish to see bad debts. The governments had to step in to provide cheap funds to the banks, so that they can continue to lend to small businesses, as these businesses create jobs.

The banks took the cheap funds, but did not lend to small businesses. Instead, they use the cheap funds to invest in the stock market and earned a big profit, on the inflated asset prices.

Is there a better way for the government to provide credit to small businesses, instead of relying on the banks, which are profit driven - and are not concerned about helping small businesses to create jobs.

I can think of two ways:

a) The cheap funds from government has to be tied to actual lending by the banks. If the banks do not lend to small businesses, they cannot get the cheap funds. This lending can be backed by partial guarantees by the government. (If I am not mistaken, this is the approach adopted in Singapore).

b) The government create another agency to provide the lending to small businesses, which is tied to the number of people employed, The entrepreneur is personally liable for the loan, but can have access to low cost credit. This should provide control over moral hazard, and serve the purpose of giving credit to small businesses, which in turn creates jobs.

Tan Kin Lian

9 comments:

Anonymous said...: Rex comments as follows,

This reminds me of the jobs credit scheme where the government gives money to firms to encourage them to keep staff and don't retrench, and there are no control checks.

I fail to understand why in super efficient singapore, the government didnt think of control implementation step whereby the recipient of the cheap funds, must show proof after a stipulated time scale, that the money received befits the purpose for which it was given and had not been abused. (as per solution a) in the posting).

A bank which takes the cheap funds and buys stocks instead of creating loans to entreprenurs and hence jobs, is just like the firm which collects job credit and continue to retrench for vague reasons. How can a scheme be implemented without control checks which should be designed at conception of the scheme. It is outrageous.

Why the super salary ministers can't even invent some simple, practical checks to prevent abuse of a system?

In the good old days when their salaries were lower, they were better and faster, now that they have overfed themselves, their standard of government administration and creativity is incredibly disproportionate with their renumeration and is utterly unacceptable, not to mention their i-am-always-right mentality.

REX; November 24, 2009 10:17 AM
Vincent Sear said...: There's in the US the Small Business Administration provide financial assistance and other services to business services.

Check it out at www.sba.gov.; November 24, 2009 12:02 PM
Robert Tan said...: In what way did the government provide cheap funds to banks for the purpose of lending to small businesses?

Did the government actually transfer any monies to the banks?

If not, how was this done and how was the conclusion that it was cheap arrived at?

The reason why I raised the above questions is that we need to be sure that the facts are right in the first place before we assess whether the actions are right or wrong.

I thought that funds are cheap mainly because interest rates in the US and other countries have fallen and Singapore's interest rates(SIBOR) have dropped accordingly. As far I have read and understood, Singapore does not manage its fiscal policy using interest rates but rather its foreign exchange rates.; November 24, 2009 12:25 PM
Steve Wu said...: This is despicable! The local banks shall rank well with the American banks which took taxpayers' monies to enrich its senior staff through wanton compensation. Both Singapore and US administrations should be taken to task for the blatant failure to ensure proper usage of public funds. The American people have spoken. Singaporeans??

A comment on the Job Credit Scheme. A back-of-the-envelop calculation should indicate that the GLCs are the biggest beneficiaries, followed by MNCs (which were still retrenching despite the JCS) and then, last in the pecking order, the SMEs.

I don't think that the JCS is about jobs at all in the first place. It's a legal transfer to the GLCs with minimal leakage. It is easy to falsify my thesis, just release the breakdown of the JCS disbursement by sectors.; November 24, 2009 2:44 PM
Tan Kin Lian said...: It is common knowledge that the US government transferred trillions of dollars of funds to the banks. Other governments adopt similar measures.

In Singapore, the money is already available at near zero interest rate. But the government did provide guarantees to the banks on the loans given to businesses.; November 24, 2009 3:20 PM
Robert Tan said...: Dear Mr Tan

Thank you for your comment. I have noted and understood your reply.

Reason why I raised the previous comment was that by reading some of the comments raised, it may appear or imply that the Singapore government has provided cheap funds to the banks in Singapore and the Singapore banks have "misused" such funds when no such cheap funds were provided by the Singapore government to the banks in the first place.

It would not be right for the Singapore government to be accused or criticized for giving cheap funds to the bank when this did not actually happen. Neither is is right to accuse the Singapore banks of receiving cheap funds from the government that was meant to be lent to small businesses when our Singapore banks did not have such agreement nor arrangement, whether implicit or explicit.

Just thought that we need to be clear of the facts and fair in our comments.; November 24, 2009 5:38 PM
Anonymous said...: REX comments as follows,

Robert Tan is correct in pointing out that it is not right to misrepresent facts. In another post entitled "Low Interest Rate", Mr Tan you made a direct reference to banks in singapore "..Their access to cheap government money..." LINE No.8 had prompted me to ask some details on same; to which you replied giving me a link to Bloomberg site. I confess that my limited financial knowledge did not allow me to link my question to your answer, so i did not pursue further trusting that somehow the singapore banks indeed somehow, took money from the government cheaply.viz "access to cheap government money".

After reading Robert Tan's comments above, and also your comment prior, I felt that really something is not right or else not documented accurately in your posts.

I suggest that it would be proper to either clarify your original posts or else retract them.

I hope you will consider my suggestion expeditiously as in my opinion it serioulsy affects your standing and credibility.

REX; November 24, 2009 7:50 PM
Tan Kin Lian said...: Rex
I am not in a habit of engaging in a debate with commentators in my blog. Out of respect to you, I will answer your question, in this instance, but I do not wish to make it into a habit. I hope that you understand.

Does the Singapore government provide cheap money to bank? Indirectly, it does.

When there was a crisis in the banking system last year, the Government came in to guarantee the deposits of all banks in Singapore. This gave the confidence for foreign depositors to keep their money in Singapore, depressing interest rates. This is why retirees get such a poor return on their savings.

I believe that there are other measures within the government's control to keep interest rate low, which does not directly involve giving money to the banks. The low rate of interest in Singapore is a result of the economic policies of the government.

Some people may not agree with me on this matter, but I do not wish to engage in an argument or debate with them.; November 24, 2009 9:22 PM
Anonymous said...: REX comments as follows,

Thanks Mr Tan for your explanation of the statement "..Their access to cheap government money..." I could understand your point of view now with the explanation in the above post.
Regarding the deposit-guarantee issue, i remember Singapore government copy-cat Hongkong, when HKG decided to do deposit guarantee stunt, our government followed suit after a short while. I am not very finanically savvy so i really don't know if Hkg or Spore end up better or worse with such policy (of the deposit guarantee).

I thought people were happy about it, now i am not so sure.

REX; November 25, 2009 8:06 PM