KUCHING: RAM Ratings has assigned AAA/Stable/P1 financial institution ratings to Small Medium Enterprise Development Bank Malaysia Berhad (SME Bank) to reflect its expectation of strong government support, underscored by its strategic role in the Government of Malaysia’s (GoM) socio-economic agenda to develop the SME sector.
A development financial institution (DFI) wholly owned by the GoM, SME Bank has been mandated to support SMEs through the provision of financing and advisory services.
It said, “SMEs are a critical component of the Malaysian economy, having contributed 36.6 per cent of the country’s GDP and 65.3 per cent of its employment in 2016.
“Under the SME Master Plan (2012 to 2020), the GoM targets to increase SMEs’ contribution to GDP to 41 per cent by 2020. SME Bank accounts for around 40 per cent of SME financing among DFIs, though its overall market share is small.
“Apart from bridging the financing gap of the unserved or underserved SMEs, SME Bank is also the GoM’s conduit in developing the targeted sub-segments of the SME sector through specific financing programmes.”
It added, “Government support for SME Bank is highlighted by a recent conversion of RM500 million of government borrowing into equity as well as continuous funding support from the GoM, through lending, deposit placements and guarantees.
“About 83 per cent of SME Bank’s profit-bearing funds were sourced from the GoM/government-related entities or guaranteed by the GoM as at end-March 2017.”
However, it cautioned, “Given its public-policy role and focus on SMEs, SME Bank’s financing portfolio inherently carries a higher credit risk, which leads to an elevated gross impaired-financing ratio.
“While SME Bank’s financing is largely collateralised, a sharp decline in collateral values or the non-recoverability of collateral could necessitate additional provisions given its low provision coverage. Besides, SMEs are more vulnerable to adverse developments. As such, the uneven economic recovery presents further risks to SME Bank’s asset quality.”
All in, it said, the recent conversion of RM500 million of government borrowing into equity would improve SME Bank’s loss-absorption buffer, albeit still sensitive to provisioning risk while its Basel I core-capital ratio would be lifted to above 18 per cent on a pro forma basis.