For years, commercial banks have been urged to improve their credit analysis and risk management to turn away from traditional collateral-based lending to credit based on cashflow, to reduce the risks of illiquid markets and unrealistic asset valuations.
Yet collateral-based lending continues to rule, particularly for small and medium-sized businesses. Banks say that given the poor accounting and business planning at most small firms, putting claims on fixed assets is the surest way to protect their downside risks from default.
One problem now is that many small firms are having difficulty in gaining access to new credit lines as existing assets such as land or plant machinery have already been pledged.
The central bank is looking to ease the problem by expanding the types of assets that can be pledged against loans, to include items such as trade invoices or goods inventories in a new law on collateral.
