Banks ‘not keen’ on loans to Indian SMEs

Banks ‘not keen’ on loans to Indian SMEs

from :The Malaysia Reserve

Indian small and medium sized entrepreneurs (SMEs) are finding it tough to tap into a RM130 million Islamic financing facility that was announced by the government nine months ago.

The main reason: Perceived reluctance of Islamic banks on loans probably due to lack of a guarantee from the authorities and perceived weak credit worthiness of the applicants. As of Jan 23, 77 out of 81 applicants for the Shariah-compliant SME financing scheme (SSFS), which is channelled through the Special Secretariat for Empowerment of Indian Entrepreneurs (SEED), were rejected. Only four entrepreneurs received financing worth RM4.4 million.

SEED director Dr AT Kumararajah said the 13 Islamic banks entrusted to disburse the RM130 million special Indian business facilitation fund announced by Prime Minister Datuk Seri Mohd Najib Razak in June 2012, were “not interested” to lend the money to the community as the financial institutions were only looking at the applicants from a “business case” view.

“It's not a special fund for the Indians. The banks are not keen to lend money to Indian entrepreneurs as the money is solely under their discretion. There is no government guarantee to that money,” he told The Malaysian Reserve.

SEED, a special secretariat, which reports directly to Minister in Prime Minister’s Department Datuk Seri G Palanivel, who is also MIC president, is meant to assist the Indian business community to get access to bank loans.

On June 9, 2012, Najib announced various forms of loans worth RM180 million for the Indian community, of which RM130 million was supposed to be channelled through the SSFS, with each of the participating Islamic banks to providing RM10 million worth of loans. This is seen as one of the plans by the government to assist the Indian community.

Aside from the Islamic banks, Malaysian Industrial Development Finance (MIDF) was to provide RM10 million in SME soft loans — RM5 million under the enrichment and enhancement programme meant for business start-ups and microenterprises and RM30 million through the microfinance facility provider under the so-called Tekun Nasional scheme.

Islamic banks that were approached by The Malaysian Reserve declined to comment on the issue.

Dr Kumararajah said 95% of the applications, which went through normal credit evaluation criteria, was at a risk of rejection at the final evaluation process under the scheme.

While stressing that there is no “special treatment” for business proposals which passed through SEED, he said the only incentive in the SSFS scheme was the 2% interest rebate given by the government to the participating banks for their cost of financing. 

“We are looking for a redesigned scheme that would enable the Indian businesses being evaluated on a different basis than a standard evaluation process.

“We understand that there are a lot more that need to be restructured in order for the Indian business community to get preferential access, in terms of funding and that is what we (SEED) are doing now,” he said.

In a step to address these issues, Dr Kumararajah said SEED has prepared a comprehensive memorandum which was submitted by Palanivel to Najib, who is also the finance minister, in a Cabinet meeting last month.

In the memorandum, Dr Kumararajah said SEED has proposed to the government to provide RM130 million directly to the Indian business community which can be managed by designated institutions such as SME Corp.

SEED also wants to work with Bank Negara Malaysia to monitor from “root to tip” the performance of the banks and both the approved and rejected applications by the joint cooperation proposed under the SSFS scheme.

If the above suggestion is not taken into consideration, he said SEED will then propose to the government to come up with a guarantee scheme mechanism whereby the banks still provide the funds, with the guarantee from the government.