LETTERHEAD OF The Hong Kong General Chamber of Commerce

Our ref: EW/SN/412/98
24 December 1998

Ms Leung Siu-kum
Clerk to Panel
Legislative Council Secretariat
3/F Citibank Tower
3 Garden Road
Hong Kong

Dear Ms Leung

LegCo Panel on Trade and Industry
Invitation for Submission on
Special Finance Scheme for small and medium enterprises

Thank you for your fax of 17 December to Mr Denis Lee on the captioned.

Please find attached an earlier letter to the Director General of Industry in which suggestions are set out on enhancing the Special Finance Scheme. We would also like to make the additional proposal that the Scheme be structured in the same way as the Hong Kong Mortgage Corporation so as to encourage active participation from banks. By allowing lending institutions to securitize loans taken out under the Scheme, banks are given the opportunity to unload the government guaranteed portion onto the debt market as government risks. This arrangement would not only free up capital, but also allow banks to lend more to SMEs after selling the government guaranteed portion.

Thank you for giving us the opportunity to comment on the Scheme.

Yours sincerely

Dr Eden Woon



Our Ref: WKC/280/98
12 October 1998

Mr Francis Ho
Director General of Industry
Industry Department
14/F Ocean Centre
5 Canton Road

Dear Francis

Special Finance Scheme for SMEs

I am writing on behalf of the Chamber's SME Committee members who have made suggestions on possible refinements to the HK$2.5 billion credit scheme, so as to better address the needs of SMEs.

As you may already know, both lending institutions and SMEs have some reservations about the scheme which may, to some extent, be the cause for the low participation to date.

Specifically, these issues relate to (1) raising the government portion of the guarantee from the existing 50% to, say, 70% or above, (2) relaxing or scrapping the no-violation clause of the 60-days repayment period over the last 12 months in order that more applicants can be eligible for loans under the scheme, (3) extending the duration of the guarantee period from the present 365 days, and (4) introducing a concessionary interest rate, preferably below the prime rate, to the government portion of the guarantee.

We appreciate that there may be difficulties in government to implement all the changes into the scheme as suggested in the foregoing. However, given the present assessment criteria, it has been pointed out that companies that qualify under the scheme are frequently those that do not necessarily need additional funds.

We feel that if it is government's intention to provide short-term assistance though the scheme to those small businesses in genuine need, it would be necessary for it to re-think the existing structure of the scheme so as to make it more "user-friendly".

Yours sincerely

Dr W K Chan

Assistant Director, Business PolicyWKC/SN/ka


Ms. Leung Siu-kum,
Clerk to LegCo Panel on
Trade and Industry,
Legislative Council Secretariat
Fax No.:2869 6794

29th December, 1998

Dear Ms. Leung,

Small and Medium Enterprises

In response to your invitation, I write to advise that the Association does not propose to send any representative to appear before the Panel on 4.1.99. In a number of contacts with Government we have made our views known on the Special Finance Scheme for S.M.E.s and representatives of the banks have also held discussions on the subject with the S.M.E. Committee of the General Chamber of Commerce. The banks recognise that the S.M.E.s are an important economic sector and they support in principle the notion of a scheme to assist the sector. The present scheme is capable of refinement to make it more attractive and more workable, however, and we would suggest attention is given to the following areas.

S.M.E.s tend to be a less credit-worthy market segment. The criteria set by the Scheme are too stringent for many of them. Few will have good track records and no past-due items over 60 days during the preceding 12 months. The stringent criteria therefore rule out applications from many S.M.E.s. Furthermore, given the marginal credit-worthiness of many S.M.E.s, the guarantee ratio of the government is not high enough. This is exacerbated by the need to share security pari passu with Government under the scheme. Priority for lenders would help stimulate support. As the lending is not fully guaranteed financial institutions need to carry out a full credit analysis. In order for this to be worth-while the maximum sums involved for each facility should be higher. The present low level means that the cost of full credit analysis offsets much of the profitability of the lending.

In many cases the finance period of 12 months is too short to permit meaningful business plans to be developed. The application and administration procedures required under the scheme are cumbersome and the time-frame is too short.

Future publicity on the Scheme should make it clear that the total financed is not fully guaranteed by Government. While misunderstandings persist in this regard the public will not understand why banks are not always willing to lend support.

Yours sincerely,

P.R. Lowndes