LegCo Panel on Trade and Industry
SPECIAL FINANCE SCHEME FOR
SMALL AND MEDIUM ENTERPRISES
INTRODUCTION
This paper sets out the proposal to set up a $2.5 billion Special Finance Scheme for small and medium enterprises (SMEs).
BACKGROUND
General Background
2. In February 1998, the Finance Committee of the Provisional Legislative Council agreed to the financial implications for setting up a $500 million pilot Credit Guarantee Scheme (CGS) to help SMEs involved in exports to obtain finances from lending institutions by providing guarantees for their loans. The CGS was launched on 3 June 1998. It is confined to pre-export financing and its beneficiaries are confined to those companies engaged in export of goods and services.
3. On 22 June 1998, the Government announced a package of special relief measures to ease Hong Kong's economic adjustment. One of these measures is to help SMEs to obtain loans from lending institutions. Whilst the prevailing credit crunch problem is affecting all companies, small and medium enterprises (SMEs) are particularly hard hit. Despite their credit worthiness, good track record and business prospects, some SMEs are unable to obtain loans from banks or have their credit line cut. With their relatively low start-up costs and greater adaptability to changing business environment, SMEs are a significant force in reviving the economy and creating employment opportunities. We therefore proposed to set up a new $2 billion scheme modelled on the CGS to help SMEs to cope with the liquidity crunch problem and to secure bank loans to meet genuine commercially viable business needs.
4. In designing the details of the new Scheme, we have listened to the views of the SME Committee, the banking sector and other interested parties. Taking into account these views, we have designed the Special Finance Scheme as described in the following paragraphs.
Proposed Scheme
5. The design of the new Scheme is based on the following principles:
- Market driven
The operation of the Scheme must be market driven. The intention is to help those SMEs which are creditworthy, have a good track record and can demonstrate business prospect but are unable to obtain adequate financing from lending institutions due to the credit crunch.
- Risk sharing
The risk of default and late repayment should be shared between the lending institutions and the Scheme.
- Risk capping
There should be an upper limit to the total amount of credit guarantees offered by the Government under the Scheme. There should also be a ceiling for the maximum amount of guarantee each company may obtain from the Government.
- Administrative simplicity
The new Scheme should be simple and easy to administer.
6. Under the proposed Scheme, the Government will act as the guarantor for SMEs' loans approved by lending institutions. The maximum amount of the guarantee in each case is $2 million or 50% of the approved loan, whichever is the less. In addition, we will deposit with the lending institution, if it so requests, an amount equivalent to the amount of the guarantee so that its loan to deposit ratio will not be adversely affected by the loans to SMEs under this Scheme. We believe that this should help ease the tight liquidity of the banking system. The proposed framework of the Scheme is described below.
(A) Assessment of Applications
7. Government will rely on lending institutions to exercise their usual prudent professional judgement in assessing applicants' creditworthiness. To ensure the equitable distribution of limited facilities, Government will implement a system to keep track of successful applicants so that no beneficiary may at any one time enjoy a Government guarantee exceeding the ceiling of $2 million under the Scheme.
(B) Eligibility
8. All companies registered in Hong Kong are eligible. However, the Scheme will not cover the loan transactions between two lending institutions or the loan transactions between a lending institution and any of its related companies. This is to avoid possible conflicts of interest on the part of the lending institution(s).
(C) Use of Loans
9. Loan applications are subject to the usual prudent scrutiny by the lending institutions. Other than those limitations on the use of the loans which may be imposed by the banks, the Scheme will not impose limitations on the specific uses of the loans.
(D) Ceilings
10. Each firm may apply, through a participating lending institution, for a guarantee from Government of up to $2 million or an amount up to 50% of the loan offered by the lending institution, whichever is the less. The loan may be offered as a term loan or in the form of a new credit line.
11. For better risk management and for more equitable distribution of facilities, an indicative ceiling of $200 million will be imposed on each participating lending institution.
(E) Guarantee Period
12. The guarantee period is up to a maximum of 365 days.
(F) Interest
13. The lending institutions will determine the interest for the loans they offer to SMEs in accordance with their established principles and Government will not intervene in such commercial decisions. Since the lending institutions will undertake the administrative work associated with the assessment, day to day management and repayment of the loan and in view of the risk sharing arrangement which will dilute their share of the collateral, we consider a spread of 3% between the interest a bank charges a successful applicant and the interest it pays to the Government for the corresponding deposit reasonable.
(G) Administration
14. Director of Accounting Services will be responsible for the administration of the Scheme on the part of Government and will be the Vote Controller of the Scheme. All payment to and repayment from the borrower will be handled by the lending institutions. There will be an agreement between Government and the participating lending institutions setting out the rights and obligation of each party and the appropriate mechanism for settling the transactions.
(H) Arrangement for Default Cases
15. On default, any amount recovered from the SME including any amount recovered through the disposal of the collateral, if any, will be shared between Government and the lending institution on a pro-rata basis according to the ratio of the amount guaranteed by Government to the size of the total loan.
(I) Participating Lending Institutions
16. All licensed banks authorised under the Banking Ordinance will be invited to join the Scheme.
Impact On The Credit Guarantee Scheme
17. The launching of the CGS has coincided with the deepening of the liquidity crunch problem, which the CGS was not meant to address. There have been varying comments on the usefulness of the CGS. Nonetheless, since the CGS is not geared towards addressing the immediate liquidity crunch problem and to avoid possible confusion on the part of SMEs and participating lending institutions alike, we believe that there is a case to merge the CGS with the new Scheme. Should this be agreed, appropriate steps will be taken to honour those guarantees already entered into by the CGS.
Review and Monitoring
18. We will put in place a mechanism to track the performance, on an aggregate basis, of participating lending institutions. The Special Finance Scheme will also be reviewed regularly taking into account the overall economic climate and liquidity situation. When the liquidity situation improves, the need for the Scheme will no longer be there.
Number of Beneficiaries
19. Assuming that applicant SMEs will each seek the maximum guarantee of $2 million for a period of 365 days, the new Scheme should be able to support 1,250 firms for the first year. The applications will be processed on a first come first served basis. As the Scheme is of a revolving nature and not all applicants will require a guarantee up to the ceiling and for the maximum period of 365 days, the actual number of beneficiaries is likely to exceed 1,250 SMEs.
Funding
20. Taking into account the $500 million grant under the CGS, subject to funding approval, the new Special Finance Scheme will be a facility with a commitment of $2.5 billion.
WAY FORWARD
21. We propose to seek approval from the Finance Committee for the allocation of $2.5 billion to the Special Finance Scheme on 31 July 1998, with a view to bringing the Scheme into operation in August 1998.
Trade and Industry Bureau
July 1998
