Credit freeze in Singapore

A few weeks ago, the Government took the bold step of guaranteeing all bank deposits in Singapore. This was to prevent the outflow of deposits to other countries that provided similar gaurantees. (Personally, I do not agree with this approach, as it continued to depress interest rate in Singapore).

Later, the Government provided some guarantee for banks to provide credits for business operations, subject to some due diligence. I remembered that the guarantee was for 50% of the lending.

I heard from a business friend that the guarantee had since been increased to 80 or 90 percent, but the banks are still reluctant to lend. (I have not verified this information). The unwillingness of banks to lend is causing some business failures - as they depend on credit to continue their operations.

In my view, it is a bad idea for business to depend on short term credit from banks for their operations. They should increase their capital or issue long term bonds that pay a higher rate of interest (say 4 to 7% p.a.). They can earn a higher return on their investment, so they can afford a higher and fairer payout to the bond holders.

To make these bonds attractive to long term investors, the guarantee can provide a guarantee on the principal and dividends and charge a guarantee fee to the issuer. This will allow the issuer to get a source of long term funding and do not have to worry about talking to the bank yearly.

This Government guarantee fee can be at a subsidised rate, to support the economy in its current phase. When the conomy stabilises, it can be done at the market rate, which depends on the risk. The Government can also set up a separate insurance company to provide the credit default insurance on commercial terms. 

Summary: Encourage businesses to issue long term bonds to get a secure source of funds for their long term operations. The Government can provide a guarantee on these bonds (subject to due diligence and a guarantee fee),  to help businesses to overcome the current economic turmoil.