Small Medium Enterprise Development Bank Malaysia Bhd (SME Bank) expects to lower its non-performing loans (NPLs) to about 5% in three years.

KUALA LUMPUR: Small Medium Enterprise Development Bank Malaysia Bhd (SME Bank) expects to lower its non-performing loans (NPLs) to about 5% in three years.

As of the financial period ended Dec 31, 2013, its NPL stood at 12.3%, a relatively high figure compared with the likes of commercial banks such as Public Bank Bhd, CIMB Group Holdings Bhd and Malayan Banking Bhd, among others, whose NPL levels are between 0.95% and 3.15%.

“We are currently engaging the necessary authorities to change the corporate structure. If things go well, then we can hopefully bring our NPL levels down to 5%, at most, in three years,” group managing director Datuk Mohd Radzif Mohd Yunus said.

However, SME Bank has already managed to bring its NPL levels down to 12.3% from a much more alarming 30% in 2010. According to its 2012 financial statements, its NPL stood at 14.14%. It intends to lower it further in 2014 to about 11%.

Radzif added that while the bank was working hard to meet its target within the stipulated timeframe, it was also dependent on the business environment.

“NPL is a risk that we have to take on. We give financing to customers who are in need of funding to grow their businesses where no other banks would want to give,” he said.

He added that for SMEs, the effects of doing business now had become more challenging. It was important for SMEs to recognize the changing business environment and move up the value chain, he said.

“This is something we have to constantly engage with our customers. We have identified two areas of intervention methodologies that we employ: general intervention and specific intervention,” he said.

The bank employs general intervention on customers to improve in areas such as account management, whereas specific intervention is used on selected identified customers that SME Bank thinks have the potential to move up the value chain, especially in terms of technology and innovation.

He added that the bank had expanded its networks to 27 enterprise and business centres (branches) at the moment. “We are also building up our new technology. We recently rolled out our new banking system, and by year-end, will roll out our mobile banking platform,” he said.

“Since we started this intervention last year, we have seen some improvement in terms of the work migration of some customers,” said Radzif.

SME Bank’s approval rate for the last 12 months is approximately 83%. The majority of its loans are given to the services industry, especially in the oil and gas, energy, education and tourism sectors.

“We do not compromise on lower credit evaluation standards. Malaysia has a good regulatory framework, so we follow its best practices,” he said.

Radzif said SME Bank segregated its potential customers on a two-fold basis: on need base and merit base. Need-based customers are those that require some “hand-holding” from SME Bank, in terms of putting in place proper financial records, or even with tweaking business plans. In 2013, the percentage of need-based customers was 57%, while merit-based customers was 43%.

SME Bank has three sources of funding, namely, internal funds, dedicated funds (from the Government) and the market, through corporate deposits and bond issuance.

The Government had allocated about RM3bil to SME Bank during the Ninth Malaysia Plan, whereby its current available balance is around RM400mil.

“On average, the funds have been recycled twice,” he said.

However, he added that SME Bank was not looking to issue any more bonds, because bond rates were not attractive in the immediate juncture.

Radzif said the bank was trying to keep its cost of funds as low as possible by using a percentage of its deposit funds for lending, and also by engaging with the Government on how to do so.

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