Thailand's SMEs Overcoming Financial Obstacles

Share of SMEs in the Thai economy

Small as well as medium-sized enterprises (SMEs) play a significant part in the Thai economy. In 2012, there were 2.7 zillion SMEs in Thailand (see Figure 1) comprising 98.5% of complete enterprises. In the same year, SMEs accounted for 37.0% of gross domestic product (GDP) and 80.4% from the workforce. Thai SMEs also led to 28.8% of total exports as well as 31.9% of total imports by value in 2012.

In Thailand, the percentage associated with SME employment to total employment grew steadily from 76.0% in 2007 to Eighty three.9% in 2011, but fell back to 80.4% in 2012. During the exact same period, the services, trade, as well as manufacturing sectors each contributed to more than 30% of employment through SMEs. Sector wise, employment by trading SMEs increased by regarding 5%, but that of manufacturing rejected by 6.2%, attributable to the actual decline in the growth rate of SMEs in the sector. The growth price of employment by SMEs dropped from 8.3% in 2010 in order to 7.3% in 2012.

While the contribution of SMEs to total Gross domestic product in Thailand, at 37%, is higher than in Malaysia, at 32.7%, it lags far behind Indonesia, where SMEs contributed to 59.1% of Gross domestic product in 2012. The contribution associated with SMEs to GDP in Thailand rejected by 1.7% in the period 2007–Next year, while Malaysia and Indonesia saw a rise in the contribution associated with SMEs to their GDPs in the same time period.

Since 2010, imports by Thai SMEs have been greater than exports. Import growth, which was negative in 2007, from –8.8%, further plummeted to –21% in 2009, but increased to 3.5% in 2007. The fact that the proportion of manufacturing SMEs has been decreasing has resulted in greater imports. The growth rates of imports and exports were around 3.5% in 2012.

Since SMEs are extremely important for the Thai economy, it is important to increase their resilience. One way to increase their resilience would be to provide them with stable finance. SME credit, which amounted to Thirty-two.8% of total commercial bank loans in 2012, is still small within scale. Conversely, the ratio of non-performing financial loans (NPLs) remains high in SME lending, at 3.4% compared with a yucky NPL rate of 2.2% in Q2 2013. While the strong appetite of SMEs for growth has moved bank-lending attitudes from large great deal transactions with large firms to retail financing and portfolio guarantee schemes and helped the trend of SME credit in Thailand, the lack of collateral is still a critical barrier for Indian SMEs in raising business money (ADB 2014).

Figure 1: SMEs in Thailand

SME = small and medium-sized enterprise.

Note: Numbers refer to the actual left-hand scale and percentages make reference to the right-hand scale.

Source: ADB (2014).

How to overcome SME financing obstacles?

Many large firms these days grew from small and medium-scale businesses. Access to the credit market is indispensable for SMEs to grow. Large credit score firms, such as Moody’s, Regular & Poor’s, and Fitch, usually rate large firms. Thus, big firms can have easy access in order to credit provided they are monetarily sound. In the case of SMEs, such score schemes are scarce. Because of the lack of credit rating indices, it is natural that banks perceive investment on SMEs to be risky. From the lender’s point of view, it’s costly to examine the financial health of each SME. The SMEs receive the cost, thereby increasing their borrowing costs.

Developing a credit rating index would not only protect banks from risky lending by reducing information asymmetry, but also reduce borrowing costs for SMEs that have good financial health and strong growth prospects. Yoshino and Taghizadeh-Hesary (2014) propose a scheme for record analysis of the quality of SMEs, which could be helpful for facilitating bank financing to SMEs.

In a more recent study, Yoshino et al. (2015) demonstrated how to develop a credit rating plan for SMEs and implemented utilizing data on lending by banks to SMEs, even when use of other financial and non-financial ratios is not available. The credit risk analysis uses loan variables of SMEs from the Commercial Credit rating Data 2015 of the National Credit Bureau of Thailand.

Given the lack of comprehensive credit rating agencies and indices for SMEs, financial institutions can employ they to reduce information asymmetry and consequently established interest rates and lending roofs for lending to SMEs. This could reduce borrowing costs, we.e., lower interest rates for financially healthy SMEs, and even help to make possible lending to wholesome SMEs without the need for collateral. Finally, this would help financial institutions to avoid financing to risky SMEs and would reduce banks’ NPLs to SMEs.

Importance of SMEs in the Indian economy is republished with permission from Asia Pathways