PLC Panel on Trade and Industry

Pilot Credit Guarantee Scheme

Introduction

This paper sets out the proposal to set up a pilot Credit Guarantee Scheme (CGS) to provide guarantees for loans on pre-shipment expenses related to export of goods and services by Hong Kong firms, in particular, small and medium enterprises (SMEs).

Background

2.SMEs constitute about 98% of companies in Hong Kong. It is therefore critical to provide these enterprises with a favourable and business-friendly environment. To better identify issues affecting the development of SMEs in Hong Kong and suggest measures to support and facilitate their development, the Government set up the SME Committee in July 1996.

3.The Committee has identified the inability in obtaining finances as one of the major difficulties faced by SMEs. Compared with larger enterprises, SMEs have more difficulty in obtaining loans from lending institutions due to the lack of sufficient capital assets as collateral or long credit record to prove their credit worthiness, the unwillingness of lending institutions to make small loans, and the usually higher interest rate charged by lending institutions. Accordingly, the Committee has proposed that as a first step, a limited CGS should be set up on the following principles :

  1. Manageable scope - i.e. limited to one area or one type of expense;

  2. Risk sharing - i.e. risk of non-payment to be shared amongst three parties : the CGS administrator, the CGS client and the lending institution; and

  3. Risk capping for Government - i.e. there should be an upper limit to the amount of money to be guaranteed by the Government.

4.The Administration accepts that the establishment of a CGS would provide incentive for lending institutions to grant loans to SMEs. Given that SMEs constitute the bulk of the companies in Hong Kong, measures facilitating their further development would in turn facilitate the overall development of our economy. We therefore agree to the proposal of the SME Committee and propose to allocate $500 million to establish a pilot CGS. The proposal was first announced by the Chief Executive in his Policy Address on 8 October 1997.

Outline of the Scheme

(A) Scope

5.We propose that the pilot CGS should focus on pre-export guarantee because this could help minimise the risk for both the guarantor and the lending institution as the borrower needs to have at least a contract of sale (details see para 10 (e) and (f) below) in hand which provides some assurance of the transaction. In addition, the contract of sale carries a date of payment, thus making it easier to work out a more definite period of time during which CGS coverage is necessary. This in turn will enable the CGS to offer guarantee coverage to more SMEs in need.

(B) Risk sharing

6.Risks are to be shared amongst three parties: the lending institution, the borrower and the CGS. The extent of the CGS coverage would be limited to 50% of the loan amount approved or $2 million for each individual loan whichever is the lesser. The total CGS coverage for an applicant at any one time would be limited to not more than $6 million. On default, the CGS would repay the lending institution the amount which it guarantees net of any sum recovered and apportioned to the CGS on a pro-rata and non-discriminatory basis by the lending institution. We believe that the amount of loan guarantee would ensure that the facility is used by our target group, SMEs.

(C) Risk capping

7.The amount of loans to be guaranteed at any one time by the CGS should be capped at the amount of the capital available in the Scheme. A one-off capital injection of $500 million into the Scheme is proposed.

(D) Administration of the scheme

8.The CGS will be administered by the Export Credit Insurance Corporation (ECIC). A statutory body set up in 1966, the ECIC is empowered under its governing ordinance to offer credit insurance and credit guarantee to Hong Kong's exporters, although hitherto it has concentrated on credit insurance business. To ensure the capping of the risk, the management and finances of the CGS by ECIC will be entirely separate from other operations of the Corporation.

(E) Participating authorised institutions

9.All authorised institutions under the Banking Ordinance including licensed banks, restricted licence banks and deposit-taking companies will be invited to participate in the CGS.

(F) Eligible applicants

10.To be eligible, the applicants of CGS must fulfill the following criteria -

  1. they must be Hong Kong exporters of either merchandise goods or services and are the principal in a contract of sale which involves their exporting on credit terms goods or services from Hong Kong;

  2. applicant companies must be registered or licensed in Hong Kong;

  3. applicant companies must be assessed by lending institutions to be credit-worthy on the basis of their usual prudent lending criteria if not for reasons such as the lack of collateral;

  4. in recognition of the increasing trend for Hong Kong exporters to source goods from other countries, the export of goods referred to in (a) above would include those transported directly from suppliers' countries to their destination with or without passing through Hong Kong, provided that the banking and shipping documents and the decision to extend credit to overseas buyers are done in Hong Kong;

  5. exports made under contracts concluded on payment terms such as Irrevocable Letters of Credit (ILC), Documents Against Payment (DP), Documents Against Acceptance (DA), and Open Account (OA) would be eligible under the scheme;

  6. in case of service providers rendering services to overseas clients on credit terms, contracts evidenced by documents such as financial documents which contain the material terms of a contract (e.g. name of the buyer and seller, description of the service required and terms of payment) would also be eligible. Oral contracts however would not be considered acceptable;

  7. only export contracts covered by the ECIC's credit insurance are eligible. This would bring about added security for the applicant on the one hand and lower the risk for both the lending institution and the loan guarantor on the other.

  8. normally, only export contracts involving credit up to 180 days are eligible. This is in line with the current practice of the ECIC for post-shipment insurance and banking practice in trade finance.

(G) Nature of the loan

11.There is no limitation on the specific uses of the loan as long as it is for pre-export expenses. The loan may thus be used for purposes such as working capital, purchase of raw material, equipment and the like.

(H) Application fee

12.It is proposed that a fee should be charged on successful applicants only and the fee would be fixed at 0.75% of the guaranteed sum. The fees would be collected to cover essentially the running cost of the CGS and occasional defaults. (Successful applicants will also have to pay premium for the credit insurance provided by the ECIC. It is estimated that the application fee plus insurance premium for the guaranteed sum will not exceed 1% of the guaranteed sum.)

(I) Mechanism for review

13.We will review the pilot CGS after one year of operation, or earlier if necessary. The review will cover the number and nature of loan applications which require CGS coverage; the default rate among CGS clients and the underlying reasons; the feedback from CGS clients, the authorised institutions and the industry, as well as other interested parties.

Public consultation

14.The SMEs Committee was consulted on 9 October 1997 and supported the proposed CGS as largely outlined above. The industry and banking sectors are being consulted for refinement of the scheme.

Way forward

15.We plan to seek approval from the Finance Committee of the Provisional Legislative Council for the allocation of $500 million to the CGS in February 1998 and hope to bring the scheme into operation as soon as possible.


Trade and Industry Bureau
December 1997