Smes

1. Introduction

Most of the finance companies in Singapore started in the 60s due to an increase in the demand of consumer credit. This increase was due to the growing affluence of the society and the rising expectation in the standard of living. The rising income resulted in higher savings that were deposited in banks and finance companies to earn interest. The rising expectation in the standard of living causes an increase in demand for loans to buy big ticket items like automobiles and consumer appliances on a hire purchase basis. Another reason was the cartel (subsequently removed) of bank interest rate and to overcome it, banks set up subsidiary finance companies to compete for deposits by offering higher interest rate.

Prior to the enactment of the Finance Companies Act in 1967, finance companies were enaged in a wide range of activities which included collecting deposits, granting of loans, trading, dealing in real estate, and speculating in shares. To safeguard the interest of the depositors, the Act was introduced and came into effect in January 1968.

In the 70s, there were 36 finance companies but that number reduced significantly over the years due to several changes in the regulation of the industry. First, is the enactment of the Finance companies Act in 1968. Next, the liberalizing of the interest rate rendered the subsidiary finance companies of banks redundant. Finally, an amendment of the Finance companies in 1994 which requires Finance companies to have a minimum capital of S$50 million within 8 years causes a major shakeup to the industry with many of the finance companies to be absorbed into their related banks. Smaller independent finance companies gave up their license. As of today, there are 3 finance companies- Hong Leong Finance Limited, Sing Investments & Finance Limited and Singapura Finance Limited (formerly known as Singapura Building Society Ltd before 11 June 2002). All 3 of them are listed on the local bourse, the Singapore Exchange (SGX). Of the three, Hong Leong Finance Ltd is the largest.

The difference between finance companies and banks is that finance companies provide small-scale financing, including installment credit for motor vehicles and consumer durables, and mortgage loans for housing. As such, finance companies cater more to the single consumer, as well as the small medium enterprises (SMEs). This means that finance companies cater to the riskier market since single consumers and SMEs have a higher chance of defaulting payment of loans. Interest rates play an important role in finance companies as it influences the consumers decision on whether to seek for financial help at banks or at the former. Appendix ___ shows the different interest rates provided by banks and financial companies, it can be seen that Hong Leong Finance Ltd Floating HDB interest rates are lower than that of POSB and OCBC Bank. Other factors which will impact finance companies include property prices, motor vehicle prices and the country's economic growth - all of which will be discussed further.

2. Structure of Industry

Table 2.1 Total Asset of Finance Companies

As at 31 Dec 2005 Assets ($ millions)

Hong Leong Finance 7,177

Sing Investments & Finance 1,185

Singapura Finance 546

Total 9,852

Finance companies are mainly involved in the services of installment credit for motor vehicles, consumer durables and mortgage loans for housing purposes. They used to have lease financing. However, as the government had placed a restriction on preventing lessors (i.e. the banks, finance companies) to depreciate leased assets against non-leased income, there has been little or no development in this method of financing. Presently, this mode of financing has dropped to zero for all the finance companies. They also provide factoring services, which refers to the providing of loans for up to 90% of debtor invoices, taking over of the debt collection process and at the same time, offering risk assessment and protection. Factoring in Singapore reached a high of E$2.88b.

The main competitors of these finance companies, other than themselves, are the Qualifying Full Banks. This group of banks comprise of DBS, OCBC, UOB, BNP Paribus, MayBank, Citibank, Standard Chartered, ABN Amro and HSBC. These banks often offer the same suite of services as the finance companies and even offer more value-added services.

The domestic assets of finance companies climbed to S$9.85 billion in June 2006, according to the MAS, showing robust growth in the industry.

3. Balance Sheet of financial institutions

3.1 Assets

End of period Total Asset Cash and balances with MAS Deposits with banks and other institutions Securities and equities Loans and advances Other assets

2003 7902.7 162.2 312.3 687.4 6657.2 83.7

2004 8308.5 168.5 460.7 709.4 6878.9 90.9

2005 9444.9 195.4 455.1 827.3 7869.7 97.4

2006 10066.6 211.7 757.1 1008.1 7972.1 117.6

The major assets for financial institutions are loans and advances which made up 79% of the total assets. Financial companies like commercial banks provide loans to, and accept deposits from, non-financial firms and individuals. On the other hand, non-financial firms provide deposits to, and obtain loans from, commercial banks. However, loans are the least liquid asset item and the major source of credit and liquidity risk for most banks. Leases are sometimes used as an alternative to loans.

Investment securities generate interest income for the bank and are also used for trading and liquidity management purposes. Most of the securities held by banks are highly liquid, have low default risk and can usually be traded in secondary markets. These are kept so as to ensure their liquidity needs are met.

Sing Investment and Finance's and Hong Leong Finance total loans in the year 2006 made up about 83% of their total assets, while Singapura Finance's total loans covered 66% of its total assets. By taking the three companies into consideration, it can be seen that loans take up the bulk of the assets in a financial industry.

End of Period Loans and Advances (S$