SINGAPORE (Feb 15): The Monetary Authority of Singapore has relaxed a number of regulations for finance companies (fincos) over its business restrictions and shareholding policy, to allow these companies to provide an alternative financing option for small and medium sized enterprises.
Among the rules that were relaxed included the raised limit on the finco’s aggregate uncollateralised business loans from 10% to 25%, as well as the raised limit on uncollateralised business loans to a single borrower from $5,000 to 0.5% of capital funds.
At the same time, fincos would now be allowed to offer current account and chequeing services to their business customers, and will be allowed to join electronic payment networks, such as the Inter-bank GIRO, Fast and Secure Transfers (FAST) and Electronic Funds Transfer at Point of Sale (EFTPOS).
However, DBS’ research analyst Lim Sue Lin noted that the restrictions on foreign currency exposure and derivatives trading still remain, in an attempt to limit the business risks borne by the fincos and allowing them to focus on supporting the domestic SME market.
“MAS will also require fincos to enhance their corporate governance and risk management,” said Lim in a note on Wednesday.
“This includes stricter rules on related party transactions and limits on exposures to the property sector.”
In the area of shareholding policy, MAS will now allow foreign takeovers of a finco, as it provides the finco with a greater scope to explore strategic partnerships and new business models to continue to finance SMEs.
“Specifically, MAS is prepared to consider an application for a merger or acquisition if the prospective merger partner or acquirer commits to maintaining SME financing as a core business of the finco,” explained Lim. “In addition, the merger partner or acquirer must be able to demonstrate expertise in SME financing and present proposals to enhance the finco’s SME lending activities with new technologies, methodologies or business models.”
So who would benefit from the relaxed regulations?
Lim believes that the ability to accept current account deposits would allow fincos to lower their funding costs and grow their net interest margins. At the same time, the increased loan size for a single borrower would now benefit SMEs who were previously too large to borrow from a finco and too small to borrow from a bank, to gain access to credit.
To date, there are three listed licensed fincos in Singapore, namely Hong Leong Finance, Sing Investments & Finance and Singapura Finance, with a combined $16 billion in assets and who currently account for $7 billion in outstanding SME loans.
In fact, Lim points out that the share price in the three fincos has risen over 10% since the MAS announcement and currently trades at 0.7 times book value and between 16 and 21 times its earnings. At current levels, they still trade at a 30% discount to the banks and Lim believes there could be potential for a re-rating based on the potential mergers and acquisitions activity and growth prospects.
Incidentally, Lim does not believe the new regulations would have any impact on the local lenders, given that fincos account for just 1.4% of the total banking sector’s assets of $1.15 trillion, and its SME loans represent up to 5% of total banking sector loans of $147 billion.
“Even if these fincos are able to scale up and double its loan base and asset size, it would still only form a small proportion of the banking system’s assets and loans,” said Lim, adding that the fincos and banks cater to different customer profiles.
As of 3.23pm, Singapura Finance’s shares are up 10.5 cents at $1.145, while Hong Leong Finance’s shares are trading 17 cents higher at $2.71 and shares in Sing Investment and Singapura Finance are trading 13.5 cents higher at $1.565 on Wednesday.
