Thai banks must do more for SMEs

 They also advised that the role of venture capital in Thailand be strengthened.

 Fumiharu Mieno, a researcher at Kobe University, said Thai SMEs face severe credit constrains, finding it very difficult to obtain loans from commercial banks or raise funds from capital markets. Mieno conducted research on the fundraising behaviour of Thai firms last year and found that most SMEs use their own savings to run their businesses.

"This is an undesirable situation," he said. State-owned banks, including the Small and Medium Enterprise Development Bank of Thailand, play a limited role, with a combined lending share of just 1.2 per cent of the market, according to Mieno.

There is no alternative source of funds, as the bond market also plays a limited role, he said. Financial institutions are the main issuers of corporate bonds, he pointed out.

Mieno found that the smaller an enterprise, the lower its debt ratio and the higher its retained earnings tend to be. Firms with fixed assets worth less than Bt200 million had an average bank borrowing-to-total asset ratio of only 3.3 per cent at the end of 2004. The trend is the reverse of that seen in developed countries, but similar to those of neighbouring countries, he said.

The difficulties faced by SMEs, both in borrowing from banks and accessing capital markets, need to be recognised, he said.

Eishi Yasunaga, executive vice president of the Japan Economic Research Institute, suggested that both commercial and state-owned banks might be failing to perform their roles properly.

Private banks, he said, show little understanding of new businesses, demand large amounts of collateral and charge high interest rates. SME entrepreneurs, on the other hand, tend to know little about financial matters, management capacity, marketing or business planning, Yasunaga said.

He urged commercial and public-sector banks to improve their credit-appraisal systems, and suggested efforts be made to improve the management capacities of public-sector venture capital funds, which should be providing medium- to long-term capital for SMEs.

He pointed out that Japanese SMEs operating in Thailand are unable to procure funds locally and rely on their parent companies in Japan as their sole sources of medium- to long-term capital. With the global economic situation deteriorating, however, these parent firms may no longer be able to help Japanese SMEs here, so they may also need access to local funding, he said.

Yasunaga suggested that training courses in SME credit appraisal should target junior and middle management and young mid-career workers with less experience. The course content should include corporate accounting and financial analysis; credit appraisal and case studies; and credit risk management, he said.

Yoshiyuki Oba, a senior research analyst, said the Japan Finance Corporation, which provides loans to SMEs, has worked closely with Japan's Chamber of Commerce and Industry (CCI). All loan applications require a recommendation from the CCI, advising the applicants on how to do business.

Consulting services provided by the CCI have contributed to the success of SMEs in Japan, he added.

Pramode Vidtayasuk, director-general of Thailand's Industrial Promotion Department, pointed out that start-up entrepreneurs in Thailand have little management expertise. For example, many do not even have a basic understanding of a business cost structure, so they need help from consultants.

"However, we have few consultants to provide business advisory services," Pramode said, adding that the department has a limited budget to hire consultants. Under the government's Bt116 billion stimulus package, the department has been allocated Bt128 million to help SMEs lower their production costs. About 500 firms are expected to benefit, he said.

Japanese researchers have suggested the government and concerned parties to improve SME credit appraisal capacity of Thai financial institutions, a solution to a limited access to funding resources faced by Thai small and medium-sized enterprises(SMEs).

 They also advise Thais to strengthen venture capital role.

 Fumiharu Mieno, researcher at Kobe University, said Thai SMEs have faced severe credit constrains, as they seem to face a severe difficulty in borrowing loans from commercial banks or raising fund from capital market. Mieno conducted research on fund raising behavior of Thai firms last year and found that most of Thai SMEs use their own savings to run their business.

"This is undesirable situation," he said. While state-owned banks, including Small and Medium Enterprise Development Bank of Thailand, have limited role, their combined share of lending is only 1.2 per cent of the market, according to Mieno.

 There is no alternative for fund raising, as bond market also plays limited role, he said. Financial institutions are main issuers of corporate bonds, he pointed out.

 Mieno found that the smaller the size is, the lower the debt ratio and the higher the retain earnings. Firm with fixed asset worth smaller than Bt200 million, its average bank borrowing to total asset ratio was only 3.3 per cent at the end of 2004. The trend is adverse to the developed countries, but similar to those of neighbour countries.

 He suggested that it is the necessity for the recognition of the SMEs' difficulty both in bank borrowings and capital market access.

 Eishi Yasunaga, executive vice president of the Japan Economic Research Institute, indicated that both commercial bank and state-owned banks might fail to do their roles properly.

 He said private banks show little understanding for new business. They also demand collateral and high interest rate. While SME entrepreneurs know little about financial matter, management capacity, marketing and business planning.

 He urged both commercial banks and public sector banks to improve their credit appraisal systems. He suggested to improve management capacity of public sector venture capital funds, which should provide medium-to long-term capital for SMEs.

 He also pointed out that Japanese SMEs operating in Thailand are unable to procure funds locally and count on their respective parent companies in Japan as the sole medium-to long-term capital source. As global economic situation deteriorating, parent firms may not be able to help Japanese SMEs here, therefore, they also need to access to local funding, he said.

 Yasunaga suggested that training course on SME credit appraisal should target junior and middle managerial staffs and young mid-career workers with less experience. The course content should include corporate accounting, and financial analysis; credit appraisal and case studies; and credit risk management.

 Yoshiyuki Oba, senior researcher analyst, said that Japan Finance Corporation which providing loans to SMEs, has worked closely with Chamber of Commerce and Industry (CCI). All applications for loans are required to obtain recommendation from CCI, advising them how to do business.

 Consulting service provided by CCI has contributed to a successful story of SMEs in Japan, he added.

 Meanwhile, Pramode Vidtayasuk, director-general of Industrial Promotion Department, pointed out that start-up entrepreneurs in Thailand have little knowledge about basic management, for example, they even do not know about business cost structure. So they need help from consultants. "We, however, have few consultants to provide business advising services to them," said Pramode. The department has limited budget to produce consultants, he said. Under government stimulus package worth Bt116 billion, the department has been allocated Bt128 million for its task to help SMEs to lower their production cost, about 500 firms are expected to benefit, he added.