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News & Events

[ 01-10-2013 ]
SMEs ready to face Basel III challenges

PETALING JAYA: Concerns that the implementation of Basel III may reduce capital resources for SME loans or may result in higher capital costs being passed to SMEs via higher credit cost are mitigated by various factors that support continued access to financing for SMEs, said Bank Negara.

“Banking institutions in Malaysia are well capitalised and liquidity requirements are not new in Malaysia. Comprehensive arrangements are in place to support the SMEs, for example, the Credit Guarantee Corp which provide credit enhancements to SMEs and the Central Bureau Malaysia to improve the quality of credit assessments,” it said.

Commenting on an earlier story by StarBiz about the potential challenges for SME lending portfolio as credit is getting more expensive with the Basel III implementation, the central bank said the treatment of SMEs under current capital standards was preserved under Basel III, whereby SME loans which meet a set of criteria are subject to lower capital requirements.

“However, the strengthened capital requirements across the board will also effectively increase the capital allocated against SME loans.

“This means lower capital requirement for qualifying SME loans would allocate more capital that may be left available for banks to also lend to other customers, which may also include other SMEs,” it said.

According to the central bank, the financing of SMEs remains an attractive proposition given the higher margins and the preferential capital treatment, allowing banking institutions to manage shareholder return expectations under a more stringent regulatory environment.

“The financing of SMEs has continued to register strong growth notwithstanding the implementation of the Basel III capital framework in Malaysia beginning from 2013, with an increase in total outstanding SME loans of 12.1% in June 2013 compared with a year before,” it said.

Adding that banking institutions had put in significant investments in building capabilities and capacity in the SME financing business in developing innovative products, strengthening credit assessments and improving the efficiency of loan approvals and disbursements in recent years, Bank Negara said this resulted in the business segment gaining greater importance.

SME financing has increased significantly to 40.5% of total business financing in 2012, from 31.1% in 2000.

The central bank also explained that the decision to implement Basel III had taken into consideration of the low leverage of the banking system coupled with strong capital buffers and the liquidity requirements that had already been implemented for the banking institutions which were well ahead of the Basel III standards.