SME scheme fails to turn banks around on loans

Tuesday, November 18, 2008Despite a government scheme to increase loan guarantees to further help small and medium enterprises and an easing of interbank lending rates, Hong Kong banks remain cautious about lending amid the global economic downturn.

"I don't see banks actively responding to the government's scheme which guarantees loans for SMEs," SME Mentorship Association chairman Anders Wong Siu-leung said.

"Our members do not have high hopes and the scheme may not be as effective as expected."
He said more SMEs are resorting to finance companies despite these firms charging higher interest rates for loans. More finance companies were also promoting loans to SMEs.

First Credit chairman Checkley Sin said the amount of his company's loans increased 30 percent last month from September and "we expect the figure for November to increase 20 percent over October."
The government has said it will increase loan guarantees for SMEs to 70 percent from 50 percent subject to a maximum HK$1 million, half of which can be used as revolving credit.
Strains in the interbank market have also eased with the Hong Kong Monetary Authority injecting liquidity into the banking system since September.

The overnight lending rate rose to 0.05 percent yesterday, from 0.1 percent on Friday. The one-month interbank rate stayed at 1 percent, while the three- month rate was 2.23 percent.
"Even though lending costs are decreasing, banks still need to evaluate the default risks of lending to SMEs as the outlook for corporates may not be optimistic," said Frances Cheung, a fixed- income strategist at Standard Chartered.

Wing Hang Credit, the unsecured lending arm of Wing Hang Bank (0302), said its number of loan applications has increased, but reiterated it was not throwing caution to the wind.
"Banks are still studying whether they should loosen their requirements for lending. They may not be confident in lending as there is a risk of not being able to collect debt amid the economic downturn," said Wing Hang Credit general manager Hilda Ng Kwok-yan.

Li & Fung (0494) chairman Victor Fung Kwok-king, a member of the Task Force on Economic Challenges, said financing in the trading sector has been under pressure, but the government's measures to support SMEs can boost banks' confidence.

Federation of Hong Kong Industries chairman Clement Chen Cheng-jen said it hopes the government will explain how Beijing's stimulus plan, particularly its value-added tax policy change, will benefit Hong Kong enterprises.

He urged the mainland government to reduce the impact of labor laws on the manufacturing sector.