THE United States sub-prime crisis has not adversely affected the lending environment in Singapore so far, but this may soon change and small and medium-sized enterprises (SMEs) could feel the pinch.

The head of a firm that provides credit and business information said several financial institutions still find SMEs bankable, but the screws might tighten for some of them.

'Those who have a poor credit standing and those due for their annual review with their bankers may soon find it more difficult to get funds,' said Ms Chen Yew Nah, the managing director of DP Information Group.

This situation is making it more critical for companies to pay attention to their credit profiles.

A good credit rating indicates that the SME can grow without resorting to excessive debt or risky practices, DP Info said.

The firm's ratings extend from DP1 - the best result - to DP8.

Ms Chen said a rating does not depend just on profitability. Other factors are also weighed, including a firm's capital structure, gearing or debt levels, liquidity, activity level, growth potential and turnover.

A typical credit rating report will include not only a company's individual assessment but that of its peers in the same industry.

It will contain information, such as profitability, liquidity, leverage, and efficiency ratios like return on equity and return on assets. Also included is publicly available information such as litigation involving the company.

'We recognise that some industries may be riskier than others. Providing industry information allows companies to benchmark themselves,' said Ms Chen.

Even if a company is not raising money, a report is useful for internal purposes, as it can help managers to understand how well they are managing the firm's financial affairs.

Ms Chen said: 'We can identify the weakest link; maybe your gearing is too high or your capital structure is too weak.'

And such reports are not just employed by banks. They can also be used by companies to evaluate whether they want to sell to certain customers.

Ms Chen said: 'The company may not want to extend credit to various customers if their credit ratings are poor.'

HSBC's head of commercial banking, Ms Tan Siew Meng, said a credit rating 'will give some added comfort to the banks. It is one of the tools that we use.'

But a banker will not just rely on a credit rating to decide on whether to lend or not.

She said: 'If an SME is very small, the financials will not be able tell us everything. Management is a key factor.

'We will look at their business model and their business track record, which includes details of how prompt they are with their payments.'

Although the perception in the market is that banks are pulling back on lending to companies, Ms Tan said HSBC continues to support its customers.

In this challenging climate, however, companies will have to recognise that priority is likely to be given to the companies that have a history with the bank.

She added: 'Your business track record with us, that is important. If the customer has been banking with us for the last three years, I can see their behaviour pattern; that is very valuable information.'

Ms Tan recommends that companies build up a relationship with their bankers even before they have plans to expand, so that the bank can better understand the business over a period of time.

Singapore's market has not developed to the point where the pricing of a loan is tied to the credit rating - where a better credit rating allows a company to borrow at lower rates.

DP Info's Ms Chen hopes banks will offer better rates for firms with more favourable ratings, as it would give companies greater incentive to improve.

This article was first published in The Straits Times on Jun 4, 2008

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