Introduction
Small and medium sized enterprises (SMEs) have
been the main driving force behind Thailand's economic development. They
account for more than 90 per cent of all enterprises in Thailand and produce
more than half of the country's national output. SMEs are important in generating
employment and income for much of the Thai labor force. They also account
for much of the country's exports goods and services, which have always
been the engine of growth in Thailand.
By their very nature, with their relatively high risk, lack of collateral,
and inadequate transparency in business management, SMEs have limited access
to finances. The Asian financial crisis of 1997 further exacerbated their
financial situtions. Many of these firms became insolvent and bank loans
to them became non-performing, aggravating the bank's excessive aversion
to credit risk. And although in recent months there has been a general improvement
in the economic and financial situation, economic recovery in Thailand remains
fragile and uncertain. Clearly, if the Thai economy is to continue firmly
toward full and broadbased recovery, it is important that SMEs be given
adequate access to financing sources.
The Asian financial crisis
The Asian financial crisis which broke out in
1997 dealt a severe blow to the development of SMEs in Thailand. The substantial
depreciation of the currency brought soaring costs of foreign debt servicing
and foreign exchange losses to firms which had borrowed heavily abroad
or which imported their inputs. This compounded the difficulties of firms
whose profits had already been squeezed by rising labor costs throughout
the 1990s.
The situation worsened after the economic turmoil spread to other Asian
countries. The depreciation of currencies across the region and the growth
in excess capacity in many manufacturing sectors meant that firms faced
declining export prices in dollar terms at the same time that many saw
their costs increasing. The recession that followed effectively wiped
out domestic demand for their products.
An industrial survey, jointly conducted by the Ministry of Finance, the
Ministry of Industry, and the World Bank in early 1999 to examine the
micro-level impact of the crisis, indicated that SMEs were the hardest
hit. The survey found that 79 per cent of small and medium sized firms
comparing to 60 per cent of large establishments reported a decline in
output after the crisis. There small establishments experienced a 13 per
cent decline in their capacity utilization rate as compared to 11 per
cent among large firms. This partly reflected the fact that over 60 per
cent of small firms were non-exporters facing the shrinking domestic market,
while nearly 80 per cent of large firms were exporters. In addition, being
labor intensive, high labor costs had more impact on production costs
of small firms than of larger firms. Nearly 56 per cent of small establishments
identified high labor costs as their major source of output decline as
compared to 38 per cent in large firms. Besides, suppliers were more willing
to give credits and services to larger firms given their higher buying
volume.
The survey also indicated a decline in the availability of credit, despite
little evidence of a severe credit crunch. Given the financial sector's
rising non-per-forming loans, the majority of establishments experienced
difficulties getting credits. The degree of difficulty was the highest
in domestic financial institutions because several finance companies closed
down after the onset of the crisis. The extent to which firms experienced
a decline in credit availability also varied by the size of firms, with
small firms clearly reporting the most significant reduction in financing.
Government financial support
In principle, a good financial system allocates
financial resources to productive sectors, in line with return and risk
profile. Financial institutions and markets raise funds from savers and
channel them to productive investment opportunities. SMEs with good investment
projects should have no difficulties obtaining loans from banks or raising
funds through debt and equity issues in capital markets. In these circumstances,
the government role should be confined to ensuring that financial institutions
and markets function properly with adequate capitalization and under appropriate
supervision and regulation.
In reality, however, financial markets may fail to function efficiently.
Asymmetric information is a well known problem of financial markets, leading
to adverse selection and moral hazards. The problem is particularly acute
in a less developed financial market and in the case of SMEs. Being small
in size, SMEs may not have adequate collateral required to secure financing
from banks. Financial institutions may find SME projects without track
records too risky to finance. Finally, SMEs often have poor accounting
practices, poor tax compliance records, and non transparent operation.
The problem of asymmetric information is even more pronounced in a crisis
situation as firms are prone to bankruptcy.
The failure of the market to finance SMEs justifies government intervention.
However, such intervention should be clearly defined and carefully targeted
to avoid abuse and distortion. It is also important that such government
support should be seen only as an interim measure that will be phased
out once the financial system is more fully developed.
In Thailand, government intervention in SME financing is not pervasive
and has traditionally been limited to policy-based lending through so-called
specialized financial institutions (SFIs0. There are 8 SFIs that deal
more or less directly with SMEs:
Small Industry Finance Corporation;
Small Industry Credit Guarantee Corporation;
Government Housing Bank;
Secondary Mortgage Corporation;
Government Savings Bank;
Bank for Agriculture and Agricultural Cooperatives;
Industrial Finance Corporation of Thailand; and
Export Import Bank of Thailand.
In 1999, the Thai government put together for
the first time a financing package for SMEs, totalling 35 billion baht,
to be extended by these SFIs. The outturn was generally favourable, with
most SFIs meeting or exceeding their targets. In addition, a Market for
Alternative Investments (MAI) was created specifically for SMEs, as part
of the Stock Exchange of Thailand. The MAI would serve as an or ganized
exchange where sound SMEs can raise funds through public offering. Even
though no SMEs have been listed on the MAI, the stage is now set for SME
access to the capital market.
The 10 August package
The Measures to Encourage Private Investment,
announced on 10 August 1999, were the latest in the government's series
of economic stimulus packages designed to promote strong economic recovery.
The "10 August package", as it came to be known, contains a
comprehensive framework of financing measures for SMEs. This framework
is based upon 4 pillars:
！！Policy-based lending;
！！Credit guarantee facility;
！！Equity financing; and
！！Financial advisory service
First, the provision of policy-based lending will be enhanced by restructuring
the Small Industry Finance Corporation (SIFC). The SIFC was established
under the Small Industry Finance Corporation Act B. E. 2534 to provide
short and long term financing for SMEs with fixed asses of less than 50
million baht. The SIFC had initial start-up capital of 300 million baht.
Its major shareholders include the Ministry of Finance, the Government
Savings Bank, the Industrial Finance Corporation of Thailand, the Crown
Property Bureau, and members of the Thai Bankers Association.
However, the SIFC currently lacks the capability to fully carry out
its role. Under this initiative, the SIFC will be recapitalised to a level
that will allow it to increase its lending to around 2 per cent of total
bank loans to SMEs by 2008. The SIFC will expand the scope of its services
to cover larger SMEs, raise its individual lending limits, revamp its
management and organizational structure, and strengthen its risk control
procedures. More importantly the SIFC network will be expanded to reach
out to customers in the provinces.
Second, a major constraint facing SMEs in obtaining financing is a lack
of sufficient collateral. To alleviate this constraint, the Small Industry
Credit Guarantee Corporation (SICGC) will be overhauled. The SICGC was
established under the Small Industry Credit Guarantee Corporation Act
B. E. 2534 to provide credit guarantees for the uncollateralized portion
of SME loans. The SICGC has a start-up capital of 400 million baht. But
its ability to provide services to SMEs is hindered by the scope of its
guarantee operations, its fee structure, and its process of paying compensation
to financial institutions.
For this reason, the SICGC will be recapitalized guarantees covering
2 per cent of total bank lending to SMEs by 2008. It will expand the scope
of services to cover larger SMEs, reduce guarantee fees, improve guidelines
for compensation, and restructure its management and operation. Like SIFC,
emphasis will be placed on improving the networking of SICGC.
Third, to support business restructuring efforts. It is important that
equity financing be made available to promote new investment as well as
assist the recapitalization of restructured companies. Three new funds
are being established: the Equity Fund, the Thailand Recovery Fund, and
the Fund for Venture Capital Investment in SMEs. By helping to lower the
debt-equity ratio of Thai businesses, investments by these funds will
lower costs and reduce risks to both real and financial sectors. The initial
capital from the government budget will be leveraged with additional funds
from international capital markets.
The last, but most important, pillar of the SME support policy is the
establishment of a Financial Advisory Center for SMEs (SFAC). It is important
that SMEs improve their own business and financial management practices
to make themselves attractive to their creditors. The SFAC, consisting
of a network of regional centres nationwide, will help SMEs address financial
problems such as sourcing funds, improving financial management, and restructuring
debt.
Conclusion
With the new financing facilities in place, it
is expected that SMEs and the Thai corporate sector in general will be
back on track to a strong recovery. After three yers of the severest recession
in Thai history, some signs have emerged indicating improvement in corporate
financial conditions and growing confidence in the current policy environment.
The exchange rate has been stable, interest rates have come down, and
inflation is under control. Private consumption and exports have rebounded,
driving economic growth. Nevertheless, there remain the challenges of
the unfinished reform agenda, the most crucial components of which are
corporate and financial sector reforms, which need to be addressed if
Thailand is to emerge strongly from the crisis.
References
1. Thailand: The Road to Corporate Recovery, Fiscal
Policy Office and Office of Industrial Economics, presented at the Conference
on Asian Corporate Recovery: Corporate Governance and Government Policy,
Bangkok, 31 March-2 April 1999.
2. Measures to Encourage Private Investment, Ministry of Finance Press
Release No. 91/1999, 10 August 1999, Bangkok, Thailand.
National Science and Technology Development
Agency (NSTDA), Thailand
NSTDA supports private sector and university R&D
efforts through grants, low-interest loans, and technical assistance through
the ICS (Industrial Consulting Services). Examples include National Center
for Genetic Engineering and Biotechnology (BIOTEC)'s facilitation of the
ENVIRONMENTAL Technology for Business Group activities and National Metal
and Material Technology Center (MTEC)'s initiation of a new mechanism
to support member companies seeking consulting assistance and other technology
services.
The National Electronics and Computer Technology
Center (NECTEC) acts as the secretariat for the National Information Technology
Committee (NITC), a high-level body charged with policy direction and
promotion of the technology for public and private sector benefits. For
companies in need of technology transfer, NSTDA provides matching services
between companies from abroad and researchers, inventors and manufacturers
in Thailand. NSTDA has also set up an intellectual property unit to assist
in drafting agreements for technology transfer, patent registration and
commercialization of research. To further support private sector R&D,
NSTDA has received government approval for qualifying companies to deduct
150 per cent of their R&D expenditures from their corporate income
taxes.
For more information on NSTDA and its activities, please contact:
Nation Science & Technology Development Agency (NSTDA)
NSTDA Research Building, 73/1 Rama VI Rd., Rajdhevee, Bangkok 10400, Thailand
Tel: (+662)6448150-99; Fax: (+662)6448027-9
E-mail: info@nstda.or.th
http://www.nstda.or.th/html/enhancing_techno-strength.html
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