Efforts to tackle Asian corporate governance, and to bring investment capital to small and medium sized enterprises, will gain a boost from a new credit rating scheme.
The scheme, devised by rating agency Standard & Poor’s, has so far pulled in over 100 SMEs in Japan and close to 1,000 in India, S&P managing director Yu-Tsung Chang told Emerging Markets yesterday.
The move to increase transparency in the SME sector, which makes up the backbone of manufacturing and service sector activity in Asian economies, has real significance for institutional investors as well as for bond market development and for banks, Michael Petit, S&P managing director for Asia Pacific corporate and government ratings, commented.
The cost of “extracting and processing information” on SMEs is very high in relation to returns for lending banks, said Petit. If greater transparency can be introduced into the sector this will not only aid banks but will enable SME obligations to be packaged and securitised he said. “This means the SME sector can become an asset class in itself”, Petit said.
Japan has some 400,000 SMEs, accounting for 95% of total employment, and a similar volume of output, Chang said. Funding problems in this sector led the Tokyo Metropolitan Government to establish its own SME lending institution some years ago, but the problem of poor transparency and information disclosure has continued to dog SMEs in Japan and across the region.
According to the OECD, SMEs globally account for 50% of GDP, 30% of exports,60-70% of private sector employment and 95% of all enterprises by number. “A vibrant SME sector is vital to the well being of the region’s economies, whether they are developed or developing,” Tom Schiller, head of S&P’s Asia Pacific region, said.
Dependable access to finance is the biggest problem facing SMEs in Asian, Schiller added. “Lack of transparency and limited availability of independent financial information about SMEs is hampering development of new sources of finance for smaller companies. The result is over-reliance on bank lending, lack of capital market access and inefficient pricing of SME credit risk.”
In Japan, S&P is cooperating with the Japan Risk Data Bank to produce an overall “rating model” for the SME sector, Chang told EM. Individual SMEs are meanwhile opting for corporate ratings in order to widen their access to finance, widen their customer base and to benchmark themselves against their competitors, he added.
One element of the Asian Bond Markets Initiative launched by Asean+3 finance ministers several years ago is to find ways of aiding SMEs through securitisation of the financial obligations of the sector. South Korea, which has a very large SME sector, has been pushing this as a way to assist an often neglected but vital sector of Asian economies.