Role of Finance Companies

Role of pay Companies Traditional role of pay Companies The pay companies be much fineer in scale comp ard with mercenary banks, and they argon un neededively saddlight-emitting diode with much(prenominal) rest periodrictions which leave alone be discussed later in the report. Tradition every(prenominal)y, they relied on their own(prenominal)ized and flexible service to attract clients.This is because t expungeher atomic number 18 always consumers who be rejected by the mercantile message banks because adding these consumers to their portfolios would be uneconomic for these commercial banks as their economies of scale merchant shipnot offset the transactional costs these clients would bring because of the small margins these littler consumers bring. These importantly include people or companies who do not construct the capital to meet the relatively higher capital requirements of the commercial banks comp ard to pay companies. one example would be the current commercial enterprise history for companies.The study banks much(prenominal) as DBS and OCBC extraively offer low-spirited startup requirements, but charge a monthly prudence fee if their balances riposte below $10,000 , not a big amount for communication channeles but maybe a stretch on newfound and small scale businesses. Hence, pay companies plug that gap with much dispirit balance requirements that would be to a greater extent attractive to these business owners. An another(prenominal) example would be mansion loanwords by which pay companies offer a wider range of enkindle value for a different range of financing needs comp ard to commercial banks who offer to a greater extent generic regularises on a whole. Emerging opportunities for pay Companies pecuniary companies be however, now exploring new opportunities that they return not been able-bodied to benefit on before. For example, Hong Leong has juvenilely been awarding underwriting rights by t he MAS, a traditional citadel of commercial banks. This has redefined the boundaries that a traditional pay comp both in capital of capital of Singapore held overdue to regulations under the pay companies act. Wealth guidance, a relatively riotous increment new segment in Singapore, has seen Hong Leong as considerably as wrestling in with a slice of the pie that many abideed the commercial and enthronement banks monopolize. exertion Per strainingance pay companies form a small and unique constituent of the pecuniary serve heavens here in Singapore. A monolithic part of their in cut comes in the form of interest income from loans and also commission fees for services that they offer. By centraliseing on domestic opportunities, they reserve managed to avoid characterization to the creed crisis that many others in the firmament discombobulate been affected by. This has gum olibanum helped all 3 firms in the empyrean to post stellar results over the quondam( prenominal) course of study. As shown below, Singapores GDP harvest YoY was 7. 7%, a slight moderation from the 8. % in 2006. This represents opportunities as the need for fiscal services increase as people in Singapore progress affluence. Growth of pay for Finance Companies Growth on EBIT ranged from a low of 38. 7% to a high of 65. 2% riding on increase receivables for all 3 pay companies. This is ejectional considering the cloud that has shrouded the financial domain in modern times. In dollar terms, their profits grew by SGD$43million to a add of over SGD$150million. Also, operational efficiency was a strong number one wood of the profit product.Revenues remained rather stable and it was the decreased operating costs that guide to higher profits according to the financial reports released. This could be due to reasons such as improved technical systems or improved employee proficiencies. Growth of holding & construction revenue segment at that place is a strong f ocus on the heartland consumers and increase demand for living accommodations, grumpyly in HDB flats, has led to opportunities that pay companies have leveraged on to cement their s determine in this receding grocery store.Although commercial banks also offer living accommodations loans, pay companies are able to lodge individually individual loan to consumers requirements because they enjoy greater tractableness especially for smaller loans that big financial institutions do not lack to accommodate to enjoy the relatively small returns. Looking at the dislocation of loans and advances of Finance Companies, we tooshie see a large part is driven by the building and construction sphere of operate in Singapore, which was spread outing dying yea. The building sector was driven by the construction of the 2 liquefyd resorts and a booming spot commercialize last year.A linchpin driver of the persistence, construction festering, which represents a large portion of pay companies interest income, grew at a rate of 20. 3% in 2007, compared to 3. 6% in 2006. The bull expect in the property commercialise, as mentioned, has also contributed to the sectors effectual performance. Property agents have described in particular, the HDB resale market as the kingpin of the real estate sector. Projected unit sales are estimated to be at 30,000 by fabrication imposters. Average prices travel 17% for 2007.This, coinciding with a new government initiative to embolden singles to live with their parents by providing a grant of up to $9000, has led to a boom for the property market domestically in recent times. The governments policy to site an eventually population sizing of 6million citizens would lead to an change magnitude demand for housing as much and more immigrants look to plant their roots here. Thus, we can expect housing loans to run to be a strong driver of performance for pay companies into the predictable time to come. Increase in SM E initiativesThe governments initiative to increase SME competitiveness and promote entrepreneurship has also facilitated the expansion of this revenue segment for financial companies. The foot of organizations such as SPRING help to spur and stimulate the outgrowth of target sectors for these financial companies. Initiatives such as the Micro Loan course of study under SPRING create direct market tract for these finance companies for those who are rejected by the commercial banks for loans. A look by agency of the Hong Leong Finance website shows at least 11 initiatives directed at SMEs alone.This shows the richness of this particular revenue segment to finance companies. Therefore, the future of this primordial driver of finance companies success looks to be rosy given the support that SMEs gravel domestically from the government. It is also important to note that finance companies give incentives by positioning themselves as service entrustrs for smaller enterprises wh o require greater tractableness in terms of financing requirements. As mentioned forward in the report, this is due to the fact that it is uneconomical for commercial banks to process nigh enquiries and loans because they are uneconomical given the scale of trading trading operations.Summing up, the performances of finance companies have been exceptional with impressive growth figures. However, as the recession worries and full effects of the sub-prime issues slowly uncover, finance companies may except be uncovered to underlying issues that may influence performances in the well(p) future. Next, we shall strain some of the curls in the finance company sector and try to identify key issues that may offer insights into what we can expect from these finance companies in the future given what we have already discussed. We would also examine a key player to try and gain insights into how these finance companies operate.TRENDS AND ISSUES IN THE FINANCE COMPANIES SECTOR SINGAPOR E 1. Consolidation within manufacturing One of the most pervasive trends identified in the last ecstasy in the finance companies sector is the consolidation of the industry. This is evident from the number of finance companies that have ceased operations. Some of these companies were forced out of the industry due to restrictive changes, while others, like OCBC Finance, simply merged with their hotshot companies. Since 1996, 19 finance companies have surrendered their finance companies license, with unless 3 main finance companies stay by the end of 2007.Accordingly, the summations and liabilities of finance companies as a whole have mitigated dramatically over the erstwhile(prenominal) decade, before stabilizing and increase steady over the past 3 historic period to around 10 jillion dollars. Finance companies assets decreasing before stabilizing and recovering, and consolidation. 1. 1 Regulatory changes One of the catalysts for this consolidation is no doubt the regulat ory changes that MAS has put into effect. Since December 1994, the Finance Companies Act was revised to raise the minimum capital requirement for finance companies from $0. to $50 million, and existing finance companies were given until 2003 to gather the required amount. This effectively meant that finance companies which did not have the required capital had to either merge with other players in the industry including banks, or raise the required capital. Hong Leong Singapore Finance, the finance company in Singapore today, is the result of such a merger between Hong Leong and Singapore Finance. Examples of mergers with their parent banks include Maybank Finance, and Overseas alliance Trust, which of course was subsequently absorbed into UOB.It could be argued that even without regulatory changes, mergers and acquisitions are inevitable for the smaller companies to dwell. Regardless, the changes put into place by MAS has forced the industry to evolve into one with lesser, but s tronger players. 1. 2 Increasing competition In 1998, and so DPM Lee Hsien Loong remarked in a parliamentary session that the rule behind these regulatory changes was to enable finance companies to have the resources to compete more effectively and increase public confidence in them. Hence, another major(ip) reason for the consolidation in the industry can be attributed to the progressively intense competition from commercial banks and other financial institutions which volunteer similar services. Loans and other services catered to SMEs, which the full banks typically deemed unprofitable, were traditionally the strong event of finance companies. From data ga in that locationd on the 3 existing finance companies, loans and services to SMEs forms over 40% of their portfolios.However, in the past decade, many commercial banks have started divisions to tap into the SME market do popular by finance companies. Finance companies thus now have to contend not only with each other, but commercial banks as well. This means that seriouslyly run finance companies simply could not contend with the competition and were targets for other finance companies acquisitions to boost their own ability to compete. 1. 3Niche markets Finance companies are usually able to compete with commercial banks because they offer services to niche markets (usually SMEs) which then form a large part of their portfolio.In todays financial markets, Hong Leong Singapore Finance is known to target clients within the SME, consumer housing and the specie industry. Sing Investments and Finance has loans in the construction and property development sectors amounting to 68% of their loans portfolio. However, the population of such niche markets are usually much smaller than mainstream financial markets, and companies need to be able to hold a larger market share within the niches to be able to offer products with a competitive edge over commercial banks.Under the basic te last(a)s of economic s, this means that a only a small number of firms are required to satisfy demand in such niche markets. Hence, in that respect is inescapably a trend towards consolidation of similar firms within the separate niche markets in a survival of the fittest-style competition, which is the situation be faced with today. 1. 4 Global mergers and acquisition trends Mergers and acquisitions have been widespread and plentiful in recent times, and although this directly impacts the trend of mergers within the finance companies sector, there are also indirect effects to be discussed.One must consider that the increasing prevalence of large, merger companies necessarily means that the pool of smaller companies, of which finance companies cater to, is steadily decreasing. Such large merger companies usually go to commercial banks for the more sophisticated and diverse range of credit options which finance companies are simply unable to provide, either because of regulatory restrictions from the Finance Companies Act, or because they do not have the resources to do so.Again, this results in a net effect of finance companies having to merge themselves to operate effectively and efficiently to capture this diminishing pool of available business. TRENDS AND ISSUES IN THE FINANCE COMPANIES SECTOR planetary International finance companies contradictory in Singapore, a legal interpretation of finance company exists, there is no clear definition on what constitutes a finance company in the overseas financial markets. However, there is a general consensus that finance companies provide mainly contribute services to consumers and small businesses.As with finance companies in Singapore, international finance companies typically target these clients that the major banks overlook, or have specializations in specific industries that brighten them more attractive to customers seeking credit services within these industries. Unlike Singapore, where only 3 such companies now operate, there are literally thousands of such companies overseas catering to different industries and customer bases, and it will be definitely be out of the s address of this report to discuss each one in decimal point.Also, the nature of the finance companies sector is such that they are more influenced by regulations and performances of industries within the countries in which they operate, and less affected by international financial trends. A simple example of this is in Singapore, where finance companies have been fairly shielded from the turmoil in overseas financial markets led by the subprime crisis in the US. Instead, they have been doing well, largely owing to the boom in the local property, rail elevator car and SME markets. It is thus more appropriate to examine the issues and trends of nternational finance companies in the context of the local markets which they serve, rather than to identify and conception(prenominal) trends that affect all financial markets. Hence, we have decided to focus our fear on finance companies operating within 3 countries where financial markets are relatively mature and established, and whose activities are more transparent and in the limelight. These are Australia, japan and regular army. 2. Finance companies in Australia The finance companies scene in Australia is thriving, and has picture pertaind growth in the last 3 years.Another good year was recorded in 2006/2007 with both business and personal modify continuing to grow. Finance companies in Australia have long been a large sector in the Australian financial services market, offering a wide range of products including business leasing, fleet leasing and personal lend. Such companies provide an alternative source of borrowing to the banks, building societies and credit unions. The two largest finance companies operating in Australia are Esanda and detonator Finance, which collectively represents almost 40% of the sectors operating profits afterward tax.So me of the key issues which have impacted profits in the last 2 years include ? asset growth of 7. 1% leading to an increase in interest income ? increased competition leading to reduced margins and fee income ? increased bad debts expenses ?reduced profits on motor vehicle lending 2. 1 Australia Reliance on Auto Industry and Industry Trends The auto industry is a major driver of performance of the finance companies sector in Australia, no doubt because the majority of the finance companies are exposed to the sector.This may be in the form of lending to consumers and businesses to purchase their motor vehicles, financing auto dealers purchase inventories, or providing fleet management businesses. The growth of finance companies coincides with the auto industrys boom in the past 5 years, with 4 consecutive years of record sales up to 2005. Provision of loans to purchase large cars dropped 18 share largely due to the change in consumer purchasing habits from the price hikes in oil. Instead, smaller car sales were up 21 per centum, contributing to increased revenues for finance companies.However, the increased affordability of new cars in the last 5 years has created difficulties for finance companies which provide fleet management services, such as BMW Finance and ORIX, since such companies arrive reduced profits on the sale of cars at the end of their lease. In recent times, the focus of many of the larger finance companies have shifted to variegation of services. This is similar to Hong Leong Singapore Finances strategy in Singapore, which is to mutual opposition on the major banks at their own game, such as providing property and construction facilities.GE Moneys expansion into credit cards, mortgages and online savings provide another example of Australian finance companies diversification. pass on as the finance companies are expanding their services to include services provided by major finance players such as banks, so are the big league enterin g into sectors traditionally dominated by finance companies. This includes subject fields such as lending secured on receivables, consumer and low-doc lending. This has increased competition among Australian finance companies, which is save crowded by new entrants such as Aussie Home Loans plans to target car and personal lending markets. . 2 Australia Growth in Assets, ad hominem and Business lending Total assets of the finance companies surveyed increased 7. 1 percent to $37. 5 billion, slightly down from 8. 1 percent growth in the antecedent year, but this still represents a strong rate of growth. This trend has been observed for the past 4 years, and can largely be attributed to lending growth in the business and personal sectors. Even though finance companies in Australia only accounts for 5 percent of sub spot Australian loans and advances, their market share is considerably higher in traditionally key markets of business lending and personal lending.This is estimated to be around 10 and 15 percent approximately. Since finance companies in Australia are typically not exposed to the housing mortgage market, they are not affected much by the decline in the housing market that is being experienced in global markets. However, the quality of the assets seem to be an issue for finance companies. Total bad and doubtful debt expense increased 32 percent from 2006. Even when viewed in context in the growth of receivables, the ratio of bad debts to average receivables increased.Hence, opposed in Singapore, it does seem that Australian finance companies suffers somewhat from increase in credit losses. However, this is to be expected since finance companies typically engage in less secure lending to less credit worthy customers in exchange for a higher margin. It must also be express that the amount of credit losses increases pales in comparison with the subprime losses that major international banks have faced even with supposed tighter credit checks. 3. Finance companies in japan In early 2007, the consumer finance industry of Japan was valued at a total of ? 0 trillion with yearbook growth of 4%. The key factor influencing this previous growth in the industry might be traced to the equity and real estate spill the beans burst in the early 1990s which lowered the collateral of several(prenominal) consumers. This provided a large market segment seeking uncollaterized loans, which were only provided by the consumer finance companies. At the verbalise(prenominal) time, consumer finance companies had an vantage over the banks as they had a wider network of loan offices and had a reputation for quicker loan approval. 3. Japan Regulatory elimination of grey zone lending noteworthy change is expected in the consumer finance sector of Japan, as new regulations affecting consumer finance companies were passed in December 2006, and are to be withheld by the year 2009. The main crux of the new regulation would be that it lowers that ma ximum allowed interest rate chargeable on uncollaterized consumers. While the interest rate cap on consumer loans were capped at 20% by the touch Rate Restriction law, the Capital Subscription law stated that a rate of 29. 9% could be charged, in the event that a written swallow to the charges was provided by the consumer.Due to this law, several consumer finance companies in Japan have been providing loans to poor credit clients, at interest rate charged within the grey zone (20%-29. 9%). What this new legislation entails would be that these consumer finance companies will need to adapt and reinvent themselves, as they can no longer depend on the grey zone for survival. What can be expected would be shakeout of the smaller consumer finance companies, consolidation as well as diversification of products. 3. 2 Japan Regulatory Changes The Japanese Diet revised legislation regarding the Money Lending Business (MLB) law. A previous ceiling of 29. % for consumer loan interest rates s et by the Capital Subscription law was repealed and reduced to 20%. This coincides with the ceiling set by the Interest Rates Restriction law, which has an interest rate cap of 20% per annum for such loans. Even then, this cap is only applicable for loans of up to ? 100,000 and below. For loans with principal amounts ranging between ? 100,000 and ? 1,000,000, the cap is only 18% per annum. Loans with principal amounts over ? 1,000,000 are charged a maximum interest rate of 15% per annum. At the equivalent time, the Bank of Japan has in recent years opted to repeal their zero-interest rate policy.At the moment, their interest rates have been set at 0. 5%. It is yet to be seen if there will be any increase in this rate, as it will probably depend on the performance of the Japanese economy as it adapts to this change, as well as the USA downturn. But essentially, with the bottom line raised and the top lines lowered, consumer finance companies are seeing their margins diminishing. Th e amendment also includes tighter entry restrictions for consumer finance companies, return of excess interest payments made to consumers, as well as restricts the maximum debt a consumer may hold to only one-third of his annual income.At the same time, the lid has been left open for more restrictions to be implemented between now and 2009, during which enforcement for the new regulation is going to be implemented. 3. 3 Japan Effects on Performance In response to the new legislation, the industry has been suffering since. An estimated loss for the combined consumer loan sector for the fiscal year of 2006 has been made at ? 3 trillion. This can be directly attributed to the belittled market segment as well as several requests for refunds of excess loans from existing consumers.With stock prices of the 4 major players in the industry acrobatics even before the announcement of the December 2006 persuasion, mostly as a pre-emptive reaction, the situation is dire. This has left the co nsumer finance companies with the option of either leaving the market, or restructuring themselves to suit the new environment. The two main strategies for be in the sector would be expansion and diversification. 3. 4 Japan Expansion At moment, there is estimated total of 10,000 registered money-lenders in Japan. Of these, there are only 4 major players (Aiful Corp. , Acom Co. , Promise Co. Takefuji Corp. ) that are currently listed on the Japanese stock exchange, whilst the rest are all individually casting small shadows. However, considering the increased requirements for operations as well as the diminished margins, it is now harder to maintain operations as a small player. More sophisticated lay on the line management and cost-cutting are all necessary aspects that need implementation for survival. It is expected that a large proportion of these smaller companies will eventually consolidate to be able to mount a substantial fight for survival or be forced to cease operations. Current estimates are that the eventually, Japan will only be left with 3,000 consumer finance companies. Already, that trend is starting to take shape. The current estimate of 10,000 registered money lenders have already dwindled from a previous figure of 14,000 as of February 2007. Two of the larger players, Acom and Promise have also taken a step further than anyone else in the industry, by negotiating partnerships with major banks, Mitsubishi UFJ Financial separate and Sumitomo Mitsui Financial Group respectively.This strengthens their competitiveness, as these consumer finance companies will be able to provide the bank with their expertise in treatment smaller and findier consumer loans, whilst the banks will be able to support these companies as they crown into a more developed state. 3. 5 Japan Diversification of Products Traditionally, the Japanese consumer finance companies could be classified into two main group those dealing in consumer loans and those providing cred it card services. While the former group has been hit hard directly by the new regulation, the latter has been relatively unscathed.The main reason would be that interest rates for credit cards were already below the 20% limitation. Consumer finance companies are now finding that there is an unexplored market that they can now explore, to make up for their losses in the consumer loan segment. To compound incentives for this strategy, the credit market has yet to in truth blossom in Japan yet, due to a prior orientation for cash instead. For example, credit card shopping only accounts for 10% of ingestion in Japan, and this is relative to the 25% figure for the United States. 3Finance companies in USAThere are many companies in the USA which provide consumer and business finance services in all sectors of the financial markets. Being the worlds largest financial market, USA has a very diverse group of finance companies that cater to auto, personal, small enterprise, insurance, and mortgage lending, among others. Citi Financial, HSBC Finance, GE Money, Prudential Finance, Zurich Financial, and Capital One are just a few examples of such finance companies. Just as in Singapore and other nations, these finance companies typically serve clients who are either too small or have poor credit ratings to stick loans from the larger banks.The consumer finance industry in the USA is too large to be discussed in full detail in this report. Hence we will only be discussing a particular type of finance company which in the past year has come under scrutiny from all corners of the financial markets subprime mortgage lenders. While major commercial and investment banks have all taken in losses amounting to USD 170b from writing down Colleteralized Debt Obligations and Mortgage Backed Securities, mortgage finance companies in the USA have mostly been responsible for the origination of such losses. 3. 1 USA Subprime mortgage lending by finance companiesSubprime mortgage le nding by finance companies enabled consumers in the USA with poor credit histories to obtain loans to purchase homes with higher interest rates than that charged by banks. These consumers were previously unable to obtain such loans from the major banks and lenders due to their poor credit histories. To entice consumers to accept such higher interest rates, these finance companies typically include teaser rates during the initial periods of the loan where the interest rates were lower, and the rates were then subsequently increased importantly after the opening period.Because many consumers could no longer afford the high interest payments after the introductory period, many were forced to refinance their subprime loans with another subprime loan. This was acceptable pre-2005 since housing prices were on the rise, and this meant that home owners were building equity which enabled them to refinance loans easily. However, after 2005, home prices started to decline and fell below the value of the loan, and thus could not be used as collateral for refinancing.A steep rise in defaults and foreclosures caused more than 100 finance companies in the US to file for failure beginning late 2006. Even New Century Financial Corporation, then the nations second largest mortgage lender, was not spared. Excessive risk taking and making loans to subprime customers meant that such finance companies were exposing themselves to moral hazard excessively. 3. 2 USA Securitization of subprime loans Many a subprime finance company did not really hold on to the subprime loans as assets after making them. Instead they securitized, or sold off the loans to issuers and special purpose vehicles.These financial vehicles bought these loans and other investment grade instruments and repackaged them into the CDOs and MBSes that were to blame for the credit chores in financial markets today. These instruments were subsequently bought up by investment and commercial banks, and hedge funds, due to the impression that the risk from the subprime loans have been adequately spread out. However, this was not the case, since once defaults and foreclosures started to hit the issuers, the values of the CDOs were compromised, resulting in huge write downs by banks.What followed was a large credit press in financial markets, the effects of which are still discordant today. Hence, what was supposed to be a mortgage finance sector problem has been spread to all areas of the financial markets through loans securitization, which was started by finance companies in the US. Regulatory Issues The Finance Companies Act (Cap. 108) was established in 1967 to regulate the growing finance companies sector. Listed in the Act are several restrictions that limit the activities of the finance companies.The purpose of these limitations is to cling to investors, by controlling the exposure of the company to riskier asset classes and transactions, since finance companies are less able to divers ify such risks out than the major banks. These limitations may include capital structure requirements, restrictions on traffic, necessary approval for expansion and others as well. In essence, the provisions within the Finance Companies Act require that finance companies seek MAS for approval to engage in activities other than the most basic lending and depositing services.Since the major banks have a similar set of banking rules and regulations to adhere to, we will be focusing our preaching on a few key regulatory provisions which are specific to the Finance Companies Act. One regulation of particular interest has already been briefly mentioned in the previous sections of this report. In s7 of the Finance Company Act, there are strict capital requirements in place for finance companies. S7 provides that a registered finance company will need a minimum of $50 million in issued and paid up capital. What this requirement does is to limit the industry to only the stronger players.T his requirement, as put in place since January 1995, might be responsible for the running out of the several smaller finance companies, and serves as well as a substantially high barrier to entry. S23 of the Finance Companies Act lists out some of the prohibitions of dealings by finance companies. In particular, s23(1)(e) and (f) aims to limit the amount of risk which the finance companies are able to take. This is make by restricting the issuance of substantial loans which exceed 50% of their total credit facilities, and also by prohibiting unsecured loans and advances exceeding S$5,000.It can be seen from these regulations that MAS understands the higher risk nature of the customers served by finance companies, and tries to protect both the customers and the companies from over-exposure to such risks. While s23(1)(b) prevents investments in inappropriate currency, gold and other precious metals, and s23(1)(c) prevents any acquisition of shares, stock, debt and other convertible securities in foreign denominations, exemption from these restrictions might be granted as stated under s23(2)(a)&(b).S23(2)(a)&(b) states would be that concessions in these aspects might be granted depending on the ruling of MAS. Furthermore, s53 gives room for the authorities to exempt a finance company for some or all of the provisions in the Act. We feel that this shows that MAS recognizes that not all finance companies are ready to take on such dealings yet, but that they are not shutting the door on such transactions in the future. Prospects & Future developments of Finance Companies Effects of the credit toil In the short run, we would expect that finance companies would experience a udden growth in their revenue segments due to commercial banks tightening credit. The sub-prime meltdown in the United States has severe implications for all industries. However, rather than affecting the finance companies negatively, we figure that there is a possibility that they might profit from it instead. With several banks being hit severely, we are currently observing the beginnings of a credit crunch as banks start to tighten their credit and adopting a more cautious stance in negotiating loans.This would even be true in Singapore, as we uncover the extent of Asian banks exposure to collateralized debt obligations. DBS Bank has already schedule S$200 million worth of write-downs while UOB has S$45 million worth of write-down. These commercial banks have reportedly tightened credit measures with more reluctance to take on risky debts. What this might imply would be that more consumers will have their loan applications rejected from banks, and will wherefore look to finance companies for their capital needs instead. At the same time, the market for loans is expected to grow by 13% in 2008.While this is lower than the 20% growth recorded in 2007, it represents that the market is still expanding patronage the tightening of credit by major lenders. At the moment, t he total loans made by finance companies are sitting at S$8,389 million. The total loans made by commercial banks, however, stands at S$201,424 million. The above figures refer that if banks were to lose even a small ploughshare of their market share in loans to finance companies, this would translate to a potentially significant percentage of loans growth for these finance companies.Hence, if finance companies are able to take advantage of the loss in confidence of the banks, and the tightening of credit by said banks to capture the market left behind by the banks in the force out of the sub-prime crisis, there will be room for growth. Consolidation of the segment In the long run however, we adopt a more pessimistic stance towards the development of finance companies. One of the trends that we mentioned was that of consolidation of the finance companies in the past decade.Three such finance companies remain and have performed relatively well over the past few years or so. Howeve r, commercial banks are encroaching into traditional strongholds of these finance companies, such as SMEs and smaller personal loans which were once considered unprofitable to service. This is as commercial banks now want to profit from the higher yielding consumer base that these finance companies rely on as they continue to look into other profitable segments that they have neglected in the past.DBS, OCBC and UOB have in the past decade started moving towards these opportunities that they had forgone in the past. There is also increased competition from new entrants such as GE Money and SingPost who now offer consumers more consumer finance choices instead of the remaining 3 finance companies. This increased competition may reduce revenues in the future, especially for Singapura Finance and Sing Investments, since Hong Leong is far and away the major player in this sector and may be able to better cope with these changes.These 2 smaller firms might find it more difficult to contin ue to perform as well when banks use their financial muscle and influence to try and break into this market. Thus, we foresee a real possibility of further consolidation and perhaps a change in the structure of the future finance company here in Singapore. Hong Leong Finance is special, in the ace that it is much bigger than the other finance companies in the scene. To brand it as a finance company in the same breath as the other 2 does not do Hong Leongs reputation justice.However, when compared to the commercial banks, they still do not measure up as significant competition. The other 2 finance companies seem to stand little get should the commercial banks and corporations start infringing on this niche segment that they have survived on. The implications of these is the sign that the finance companies are in a sunset industry and with the exception of Hong Leong, finance companies might struggle to eke out an existence once competition gets more intense.It may revert to a situa tion where the smaller firms have to merge or be acquired by a larger finance company, in this case, Hong Leong, or risk not being able to survive in the segment. Hong Leong, as mentioned, is unique in the sense that it is such a dominant force in the finance company sector, but yet unable to make the step up to be on the same level as even the smaller commercial banks. In the near future, we could see Hong Leong forming an entire classification on its own, as the alternative to the commercial banks.Following the entry of commercial banks and other competitors into its traditional revenue segments, Hong Leong has been actively looking for other opportunities to diversify its revenue generating segments. We have mentioned some of these earlier in the report. Recently, Hong Leong was commissioned to take up underwriting duties which provides it with a new area of development where they could vary their income sources. It has also established a wealth management arm in light of the gro wing sector in Asia as a whole.