Financing these companies is necessary for Taiwan, but banks face their own challenges assisting these unique clients.
SMEs employ a massive 80% of Taiwan’s workforce, as its president Tsai Ing-wen noted during a meeting with local SME business associations in September. Tsai has voiced her support for SMEs, referencing their strong position in Taiwan and the country’s dependency on these businesses to thrive.
But as SMEs have burgeoned in Taiwan, so too has their need for financing, the majority of which comes from bank loans. As a result, the volume of SME loans has increased rapidly in recent years. According to the Financial Supervisory Commission, SME loans from domestic banks made up about 16% of the total loans in 2006. By August of this year, that number had increased to 25.29%.
The increased number of loans for SMEs doesn’t tell the whole story. Despite the buildup, there are still major hurdles for such businesses seeking funding. SMEs are generally family-owned companies that come with a variety of business models. Given the gamut of such businesses, there are significant differences, and thus varying risks. SMEs, especially micro enterprises, have higher uncertainty in their operations, unstable repayment sources and low transparency of financial information, just to name a few glaring problems. Because of that, SMEs often face pressures from financial institutions to pay high interest rates in order to secure a loan – if they’re offered a loan at all. Unfavorable terms for a bank loan can be devastating to small businesses trying to remain competitive.
With SMEs as a key part of Taiwan’s economy, the government is keen to ensure their survival. Taiwan’s dedication to the growth and support of SMEs is evidenced in the Taiwan Business Bank (TBB), a policy bank and the only SME specialized bank in Taiwan. As of October 2018, TBB’s SME loans accounted for 49.1% of its total loans (excluding loans to government and state-owned businesses), making it the largest SME lender among Taiwan’s eight state-owned banks. Around 75% of TBB’s loan customers are SMEs with capital less than NTD10 million ($330,000).
Through its history in Taiwan and remit to serve SMEs, TBB has become exceptionally positioned to aid SMEs. As the bank has found, because of their unique nature, SMEs are needy clients. They require equal parts financial options and guidance, demanding the banks serving them have a range of services that they can nimbly float between. In addition, the banks need to be perceptive to the differing needs of SMEs based on the age and development of the SME.
According to research by the Ministry of Economic Affairs, almost 30% of SMEs in Taiwan fail in the first five years, pointed out TBB chairman Bor-Yi Huang. “In order to help SME clients to achieve sustainable operations and growth, we not only offer customized and differentiated financial products, but also guidance and consulting services to help improve the financial structure and business management,” he said.
These extra services are key for SME survival. For instance, SME clients often lack proper accounting systems, and may have distorted financial statements that fail to meet the requirements of a CPA. That makes it challenging for them to obtain loans from financial institutions.
Because of this, banks like TBB have had to create more bespoke financial products and services to meet SMEs’ needs. SME customers expect consulting and assistance from banks for the improvement of their financial and operating structures, as well as business management, in addition to the usual financial services. More and more, this also means access to cutting edge financial technology, and Taiwanese banks know it too. For instance, TBB has designed a credit rating model specifically for SMEs and has a “revenue recognition” mechanism to estimate companies’ annual revenues. TBB has also increased its fintech budget by $34m, or 160%, in 2018 to further improve IT functions, expand smart branches and provide more digital banking services.
“Facing the wave of fintech and the fiercely competitive financial environment in Taiwan, Taiwanese banks must focus on technology to enhance the SME customer experience, optimizing physical and virtual channels, and developing innovative financial products, including new payment methods and digital supply chain financing solutions,” said Chairman Huang. The next generations of SME clients will be even more digitally minded, making the banks’ access to the tech space essential, he added.
Sometimes a specialized approach also involves services outside of what may be considered regular financial services. For instance, TBB launched in 2006 its SME Disaster Recovery Project, which financially supports SMEs whose businesses were marred by catastrophes like earthquakes, floods or typhoons. The programme has since been used to help SMEs like those devastated in the Hualien earthquake earlier this year.
“As a SME policy bank with a special mission, TBB always runs a counter-cyclical policy to help SME clients get through difficulties or economic downturns,” said Chairman Huang, explaining how important it is for SME clients to have special support in the case of disasters.
As small and integral players in the Taiwanese market, SMEs are particularly sensitive to economic downturns and macro issues like climate change. That makes the banks serving these clients keenly aware of such matters. For TBB and its fellow banks, the next wave of policies and financing will be one of sustainability and social and environmental consciousness.