Types of Credit Facilities Offered by Commercial Banks

Types of opinion Facilities Offered by moneymaking(prenominal) marginsThe mercantile verifys argon the most upshotant player in the banking system of rules. As at the reverse of December 2010, there were 9 domestic and 14 locally integ sendd foreign mercantile banks (BNM, 2011). Be blue is the tend of licensed commercial banks as at 31 December 2010-Commercial banks (Locally owed)Affin bevel BerhadAlliance confide Malaysia BerhadAm vernacular (M) BerhadCIMB stick BerhadEON till BerhadHong Leong wedge BerhadMalayan wedgeing BerhadPublic assert BerhadRHB Bank BerhadCommercial banks (Foreign owed)Bangkok Bank BerhadBank of America Malaysia BerhadBank of China (Malaysia) BerhadBank of Tokyo-Mitsubishi UFJ (Malaysia) BerhadCitibank BerhadDeutsche Bank (Malaysia) BerhadHSBC Bank Malaysia BerhadIndustrial and Commercial Bank of China (Malaysia) BerhadJ.P. Morgan Chase Bank BerhadOCBC Bank (Malaysia) BerhadStardard Chartered Bank Malaysia BerhadThe Bank of Nova Scotia Berh adThe Royal Bank of Scotland BerhadUnited Overseas Bank (Malaysia) Bhd.Commercial banks beseech various types of character mentionence facilities to SMEs. There be working with child(p) imparts, immovable assets facilities and trade financing facilities. anyways that, Credit warrantee good deal (M) st gradegy in interchangeable manner leaded by move commercial banks. Credit Guarantee Corporation was established with the habit to help Small and Medium Scale Enterprises (SMEs) with push through or with insufficient confirmative to earn opinion facilities by commercial banks (Telekom Malaysia Berhad, 2010). CGC is participating with commercial banks which embroil Malayan Banking Berhad, RHB Bank Berhad, AmBank Berhad, CIMB Bank Berhad, EON Bank Berhad, Affin Bank Berhad and OCBC Bank Berhad ( chore add for SME, 2011). running(a) cap bestows is ready(prenominal) to contain the lilliputianfall in working capital expectment such as bank oerdraft and revolving attri bute. (Eddie, 2006) Overdraft mental quickness is convenience SMEs to draw additional funds at a time from current account (Eddie, 2006). Besides, the facilities fast in raising capital to cognitive process for tune and making investment. Bank overdraft has no icy renderment schedule, sake go forth charged when the funds atomic number 18 utilised and no loading fee for individual appli put forwardts on overdraft amounts of RM250,000 and below (Public Bank Berhad, 2011).Revolving character is a working capital facility usually helpful as short marches working capital backup. Borrowers can steady polish up to either pay the full amount or renew the add tenure by servicing of the wager at the end of the bestow period. For SMEs borrower, commercial banks nourish the flexibility of drawing funds as and when required, the quittance period is over 1 to 6 months term. A part that, SMEs can choose to repay in full upon maturity or to pay only the interest but the minimum amount of RM100,000 (Public Bank Berhad, 2011).Table 2.1 plus conversion cycleDaysDebtors reference terms90Inventory swage60150LessCreditors credit terms60Asset conversion cycle90If the forecasted gross sales turnover is RM5 one(a) thousand thousand, then the Working Capital Requirement depart be 90/365 x RM5.0 million= RM1.23 millionFor the purpose of fixed assets financing is to finance fitty, protrudet and equipment science and likewise bell of construction for factory and shop house. Term lendword, leasing and lock purchase atomic number 18 the credit facilities types of the capital expenditure financing (Public Bank Berhad, 2011).A term bring is a fixed amount of bestow from a bank for a period of time and repaid according to proper(postnominal) re compensation schedule. The borrowers moldiness(prenominal) be able to manage the cash draw effectively for repayment the add (Public Bank Berhad, 2011).Trade financing helps to tick the companies trade transactions and international billet community. There are deuce group of trade financing which are local purchases or sales, import or export services. For local purchases and import services, Public Bank Berhad providing the upshot of credit facilities which are letter of credit, trust receipt, bankers acceptance and bankers guarantee. For local sales and export services offering bankers acceptance, bankers guarantee, bills of ex channeld purchased and export credit refinancing (Public Bank Berhad, 2011).Credit Guarantee Corporation (M) turning a mien includes Credit Enhancer Scheme and Direct Access Guarantee Scheme. Credit Enhancer Scheme eligibility must be Malaysian owned, borrower must devour favourable pecuniary unload and line of descent enterprises establish on the definition of SMEs. Type of facilities offered by Credit Enhancer Scheme is term bring, Overdraft and all type of trade facilities. inwardness impart amount up to RM10 million. Guarantee spinning to p has 2 portions which is secured and unsecured. The BLR rate is 6.3% (RHB Banking Group, 2011). Maximum interest rate for each guarantee cover theatrical role bond for Credit Enhancer Scheme as followsCGC Guarantee contendEffective Rate100%BLR80% 100%BLR + 1.00%70% 80%BLR + 1.25%60% 70%BLR +1.75%50% 60%BLR + 2.00% 50%Free to citationTable 1 Interest rate according guarantee cover partageAccording to past researcher Daniel Dusanjh, Direct Access Guarantee Scheme can be obtained in CIMB, Maybank and Ambank. Credit facility is prune from RM50,000 to 3 million. The interest rates for DAGS ranges from 1.00% to 1.75% + BLR.Past researcher Daniel (2009) give tongue to that CIMB Bank offers credit facility under Government Assistance Scheme which is line for Small and Medium Industries and . In addition, CIMB Bank also provides Small enterpriser Guarantee Scheme. storehouse for Small and Medium Industries 2 and New Entrepreneurs Fund 2 eligibility criteria include patronage en terprises based on definition of SMEs, shareowner fund could non to a greater extent than than RM2 million, public listed and organisation link companies shareholding non more than 20%. In addition, the Malaysian resident shareholding must at least 51% and the SMEs not exceeding 7 eld in operation if more than 7 long time in operation banks leave consider provided intermediate net profit over the last 3 years. The interest rate for FSMI 2 is 4% to 6% based in jeopardy assessment of SMEs. Credit facility is range from RM50,000 to RM5million. Credit facility could be term add and overdraft and maximum term of 5 years (CIMB Bank Berhad, 2011).Small Entrepreneur Guarantee Scheme offers much dissimilar terms, maximum impart amount is RM50,000 with an interest rate of 1.5% per annum + BLR. It should be celebrated that this final cause covers much micro businesses (CIMB Bank Berhad, 2011).2.1.2 capital of SingaporeCommercial banks in Singapore offer various types of credit fa cilities to excel change and mass mean(a) sur casing enterprises, including working capital financing, fixed assets financing, specialized financing, trade financing and government service strategy.Working capital financing is vital for the growing business. The purpose is to finance the everyday business operations. A number of general types include factoring imparts that give credit for account receivables, overdrafts facility utilized when business make payment exceeding the balance in current account, and revolving loans that the loan amount can be re-borrowed (Government of Singapore, 2009).Factoring loan is an account receivables change to bank for immediate cash. A charge of 1-3% levied on gross note rate or an interest of 5-8% per annum. approximately of commercial banks in Singapore have this type of loan such as DBS Bank Ltd, HSBC occult Bank (Suisse) SA and Malayan Banking Berhad (Government of Singapore, 2009).Bank overdraft is the cash ready for any business need and also means that withdraw from bank exceed the available balance. Interest charge for bank overdrafts are normally 1-2% above elevation rates. Most of commercial banks in Singapore have this type of loan such as DBS Bank Ltd, HSBC Private Bank (Suisse) SA, Malayan Banking Berhad, model Chartered Bank and United Overseas Bank Limited (Government of Singapore, 2009).Revolving credit is loan sum available for fixed period during which amounts repaid may be re-borrowed. For revolving credit, company assets such as machinery may have to be provided as collateral. . Most of commercial banks in Singapore have this type of loan such as DBS Bank Ltd, HSBC Private Bank (Suisse) SA, Malayan Banking Berhad, measuring stick Chartered Bank and United Overseas Bank Limited (Government of Singapore, 2009).For fixed asset financing, commercial banks offer commercial, industrial and property loans. Like lead purchase is the most common loans for fixed asset financing, the purpose is to f inance the business property, machinery and motor vehicles. During the settlement of hire purchase loans, banks go away hold the legal rights over the asset until fully repaid. The commercial banks can finance up to 90% of equipment price (Standard Chartered Bank, 2011).Specialized financing is the loans are aimed for welkin specific SMEs such as shipping, veritable e severalize or dealership. Maybank provide the loans of car dealership and vessel (Maybank, 2011). An new(prenominal) way, OCBC Bank offer shipping, real estate and commercial property loans.In Singapore, government assistance scheme separate to 2 groups which are local enterprises financial scheme and internationalization finance scheme. Local enterprises financial scheme is typically apt(p) for modernization and upgrading the base and equipment, expanding the manufacturing capacitor. Working capital loans facilities and fixed assets financing loans facilities are available under local enterprises financial schem e. Working capital loans include Micro Loan Program and Loan Insurance Scheme. For the Micro Loan Program, maximum loan amount up to S$100,000. This type of loan is unsecured term loan and the loan term is from 1 to 4 years. The minimum of interest rate is 5.5% per annum. Eligibility of this type of loan with no more than 10 employees and the SME must incorporated in Singapore with no slight than 30% shareholding (OCBC Bank, 2011).Loan insurance scheme offers an option gateway to support for local enterprises through the use of loan insurance (UOB Bank, 2011). This type of scheme do not have limit amount but the insurer has veto right over S$1 million. Now, the government would point in improving loan insurance schemes to assist subtile and medium enterprises (Ryan, 2011).In Malaysia, there are several procedures and condition needed for SMEs in obtaining loan. The loan natural covering process generally has tercet broad stages. These are business plan preparation, the submis sion of the loan practical use and the assessment of the loan application (Banking Info, 2011).First stage is preparing the business plan, commercial banks forget require information regarding the company before they make decision whether to grant a loan to it. It is infixed to provide the full and complete information on the company, the reason is to ensure the loan affect complete smoothly. For a small and medium enterprise, the preparation of a business plan is significant. Business plan is outlining the vision and how the companies manage to achieve the objective. In the business plan, the written must be simple and clear (Banking Info, 2011).Second stage is the application process, to deepen the application process, applicant should send a suitably completed loan application form together with the business plan and all trance documents as required by the commercial banks. Loan application forms and loan application checklists are different in each commercial bank. Althou gh the application forms and checklists are different but required document more or less the same for verification and evaluation (Banking Info, 2011). According to Chuah Mei Lin, there are two checklists provided by commercial for SMEs applicant. The first checklist written pile the general types of documents and data required and second checklist setting out the more specific documents or information required for the kind of application facilities. She said that the banks go away ask for additional information and documents if get insufficient data (SME Corp, 2010).The following is the documents required for the loan application-Statutory Documents for Corporation scroll and articles of associationCertificate of incorporation (Form 9)Return of allotment of shares (Form 24)Register of music directors (Form 49)Copies of directors or guarantors ICForm J of directors or guarantorsDocuments for Partnership and Sole proprietorshipBusiness registration and licenseIncome tax returnFo rm J of partner or proprietorFinancial and Management Documents3 years audited financial statements (certified by auditors for non corporations)6 months current account statement provided by other financial institutionsAll borrowings disclosure and letter offer by other financial statementsLoan repayment statement utilisation from other financial institutionsBusiness and cash flow bulgeionMajor customers and suppliers listReceivables and Creditors AgingMost up-to-date management accountsFeasibility report (for project financing and new ventures)Company and directors profile, business planApart on above documents provided, small and medium enterprises also require prepare the warranter documents such as valuation report, photocopy of sale and purchase promise and relevant collateral such as land title deed. otherwise relevant documents such as invoices and commercial document, documents to prove other descent of income also need to submit to commercial banks (Banking Info, 2011) .Commercial banks could make out interviews and admit out a site visit to business premises for the excogitation of understands the business and clarification. This is to facilitate the commercial banks to verify and measure companys financial mental attitude (Banking Info, 2011).The last stage is assessment of the loan application. Commercial banks depart access the credit application after the borrower submission all the documents required. For assessment the loan application, commercial banks would view for certain basic requirements, for example the business viability, capacity to make repayment for loan application, whether the loan application is for business development, and credit history with commercial banks and to assess whether the risks are acceptable. Besides, commercial banks will also assess for the businesss credit risks that are called 5Cs, character, capital, capacity, conditions and collateral. Commercial banks will analysis 5Cs to decide approval or rejecte d the loans (Banking Info, 2011).According to Chuah Mei Lin, commercial bank will use 14 to 30 days to process the application depend on the size of the loans. If commercial bank approves the loan application, they will issue a letter offer to the applicant within three working days (SME Corp, 2010). A letter offer will state the term and conditions. The borrower should understand all the term and condition write down in letter of offer. The common term and condition include periods for repayment and payment in default, submission of financial statements, while the company change the nature of the business and the requirement of the borrower After the loan approved, the borrowers can utilised it within 5 working days. If decline offer, the companies can appeal against facilities (Banking Info, 2011).2.3 task FACED BY SMALL AND MEDIUM ENTERPRISES IN OBTAINING LOANSMEs have difficulty in obtaining credit facilities from commercial banks when compared to large industries during crisis period fifty-fifty in normal period. The main reason always is low positivity earn by commercial banks. Almost all commercial bankers in the world will interest in the profitability business. Since loaning is the article of faith activity of a banks and it is its responsibility to make sure that all monies lent out are collectible. As such, commercial banks make sure that the creditworthiness of borrower will repaid the loan through assessing the information provided by applicants. (Anna, 2008)During global economic crisis, loans will be difficult to obtain especially risky loans will plump increasingly strict (Factoring Financing Articles, 2011). This is adult news for SMEs since they form the riskiest borrowers. overdue to the loan condition of commercial banks too strict, SMEs set about the problem in obtaining loan (Hongbo and Xiaojie , 2009).Insufficient collateral and social guarantee systemIn Malaysia, some small and medium enterprises do not qualify to obtain credit facility from commercial banks. Such as wish of collateral which is the big issue in obtaining credit facilities from commercial banks. The low value of outdated equipment is difficult to collateral as the credit facilities. (Kian Seong, 2010). Collateral is essential because it decrease the credit risks of commercial banks.In Singapore, Gabriel (2009) said that small and medium enterprises are set about problem in securing essential loans. For unprecedented crisis lining by SMEs, the government assistance schemes still do not far-off enough and not suitable. plainly the real problem is the commercial banks unwilled to lend the loan under government scheme because they reluctant pay the cash first. Although the government willing deal 50 to 80 percent of risks but the government guarantee portion is difficult to claw back. But if the borrower cannot pay up, the government agreed to bear the risk for the portion of loans. Most of the SMEs companies need working capital financi ng that is cash overdraft. For working capital loans, government assistance scheme usually do not be to provide.In China, when SMEs applying loan who face strict condition for mortgage (Hongbo Duan, Xiaojie Han Hongbo Yang, 2009). Customers asset mortgage as the basis of the commercial banks decided whether to approve the loan application. It means that SMEs insufficient collateral assets, and cannot be effectively secured. Most of SMEs do not fall in up the conditions of the collateral assets. SMEs always have deficiency of plant and equipment for collateral through the view of enterprise asset structure. For the snatch of the loan application, the equipments are outdated, the collateral value of which is relatively low (Jiantuo, 2007).another(prenominal) problem faced by SMEs is the enterprises property legal rights, it is because a coarse number of SMEs is having the joint cooperation. This joint cooperation will lead to the ownership of property, plant and equipment and ot her real estate property not apparent. Therefore, the fixed assets do not used as loan mortgage. Simultaneously, due to the high cost and complicated process of mortgage register, the SME get that guarantee from mortgage will much more difficult (Xiao Li, 2003).To carry out the protection act, SME loan guarantee must refers to the method of assurances of the debt agreement. The warrants credit is increased when all the way through utilize of third-party credit with reward. At that moment, both sites credit can turn to a balance and the capital achieves to a proper musical subdue (Xiao Li, 2005).Even if local governments put more and more efforts to develop credit guarantee institutions for SMEs, they are still facing many problems.SME credit endorsement institutions help out the small and medium enterprise to get multi-funding for capital collection. But too small of the capital scale warranty institutions also cannot assist more in SME financing. In most areas of SME warranty fu nding is governmental financial funding. Although the government put effort to help out SMEs but it is still far from their needs for warranty funding. SMEs still judge for other credit financial support. Simultaneously, issue small loan and bear higher(prenominal) cost in financing also the problem faced by small warranty funding institutions (Xiao Li, 2005).Commercial banks will not simply recognize the information prepared by warranty institutions. Because of the be tax revenue, bank management system and information service mall cannot obtain a full business and personal records (Howrey 2011). So, bank has to face more risks in lending loan to SMEs.Interest rates and process beIn Malaysia, raise in interest rate is one of the problems faced by SMEs. SMEs cannot bear those high interest rates. While commercial banks willing to gain high profits, small and medium sized enterprises will be hard to negotiate low interest rates with them. Commercial banks are rejecting the applic ation of small loans due to high lapse and supervise costs. Commercial banks judge the SMEs as riskiest borrower because of their insufficient assets to fulfill requirement, low capitalization and high mortality rates. For this situation, to raise the fixed and working capital from commercial banks is harder.According to Fazlur (2011), SME face difficulties because of the bank reluctance provide loans to them. Many banks are unwilling issue loans to them because of high processing costs and monitoring costs. In addition, interest rates for SME loans are high due to the high processing costs.But CEO of Unique Trust, Capt rtd Prince Kofi Amoabeng said that they must express admonition the government to take some decisions to force interest rates down, because low interest rates will lead to the banks stop loan to the SME sector so SME is going to match. Therefore, they all have to go to the non-bank financial institutions where they would be given the loans at even higher interes t rates (Fidel Amoah, 2011). unforesightful documentation and managementMalaysian SMEs are always regarded as higher risk borrower because of their shortsighted documentation. SMEs have no lucrative projects, low quality, real estate title deed is not clear, no clear business aims and succession business plans, and no available credit history. Besides that, small and medium sized enterprises unable to give necessary documentation like financing accounting and track records for application of credit facilities. Due to that solemn documentation needed by commercial bank so they will delay the processing of application loan(Gloria, 2010).In India, small and medium enterprises suffer losses in their business so they always provide bad track record for application loans. Besides that, SMEs seldom have a long history so they usually hard to get loan (Gandhi, 2011). According to Executive Director of First Banc Mawuli Hedo, it is possible to reduce the rate of bank facilities but majorit y of the SMEs do not provide proper documentation (Obeng-Sakyi Sobgbodjor, 2010).In Thailand, the major obstruction for SMEs is facing several financial problems which include trouble in debts and neglect of working capital. SMEs have facing problem in obtaining loan from domestic commercial banks especially in business of handicraft products. They have deficient plant and equipment and do not use standard accounting procedures. (Arunee and Anongnart, 2000).From the SMEs opinion, they have been complained that shortage of information and steerage provide by commercial banks, complication and trouble related to credit facilities application procedure, insufficient requirement of SMEs, high interest rates charged, and lack of collateral are the major problem access to finance (Sinswat and Subhan, 2010).From the commercial banks point of view, the main obstructions for loaning to SMEs consist of lack of collateral provided by SMEs, inadequate business experience, poor management, un trustworthy accounting system, no business plan, no long credit provided, high transaction and operational costs per SME loan application (Sinswat and Subhan, 2010).In China, most SMEs companies financial performance is not satisfactory by commercial banks. SMEs companies always with low level of average profit because they are in high competitive industries. In addition, their bankruptcy rate is very high for the reason that they are easily bear upon by business environment, sensitive to the effects of variables and risk. They have poor supervision and sense of credit. As such, after suffering from a huge loss, SMEs normally cannot raise any corrective measures. They attempt to be delayed the payment for interests and principle and let the lending bank suffer the loss. Furthermore, SMEs is difficult to meet the requirement or condition in the way of operation scale and business capacity due to the present credit assessment system is set for large size enterprises (Xiao Li, 2003). With unofficial financial accounting and poor management, so SMEs unable to meet the bank collateral conditions and guarantees due to commercial banks offer most of mortgages loans is secured by real estate. As most SME loan is an urgent require for capital due to short-term liquidity stress, for term of revolving credit cannot be correctly measured and the probability of overdue retribution is relatively high. Commercial banks have problems to assess SMEs production business when face with such complicated SME market (Yanan Chao, 2010).Rejecting Loan ApplicationIn Malaysia, if refer to the form of cash flow in SME Company, know that inability to scram cash to repay the loan, commercial banks automatically will rejecting loan application (Banking Info, 2003). SMEs will face problem in obtaining loan such as the commercial banks rejecting loan application, the general reason include poor credit history, inadequate capital commitment, inadequate supporting documents, unacceptable f inancial problem, lack of financial information and doubtful repayment ability. Besides that, the borrower is the high risk enterprises which overdependence on a single purchaser or dealer (SMI/SME Business Directory Malaysia, 2010).HSBC Bank Malaysia Bhd managing director Thomas Varughese said that the top issues to reject loan application is the applicant do not provided enough financial information. Besides that, SMEs do not perform well in managing their financial position. other issue for rejecting loan application is the poor credit history for the enterprises, director and guarantors. (Kian Seong, 2010).Reduce the facilityIn Malaysia, Banking info (2003) recorded that commercial banks perform periodical review of their credit risk profile of existing loans and based on this assessment, if their assessment proves a high default risk profile, the commercial banks will reduce the amount of credit facility.In India, if the SME companies without increasing the security, commercia l banks will maintain or reduce the credit facilities (Aditi, 2005).In Singapore, Hng kiang (2009) said that the SMEs credit facility from commercial banks is secured by strong collateral, but they also will reduce the credit facility during the recession period.