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SME loan guarantee scheme a bad idea from the start

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HERE IS A story about how to get your money back if you are a bank that has made a duff loan and are looking for ways to avoid taking the loss.

We shall call the bank Participating Lending Institution 1 (PLI-1). It had a problem with Company A to which it had an outstanding loan of HK$3.9 million and a HK$1.6 million overdraft. Company A stopped making repayments since March 1999.

In December 1999, PLI-1 applied to the government for a HK$2.9 million loan guarantee to Company A. This was approved, and later that month, Company A drew down the guaranteed loan even though PLI-1's credit assessment of Company A was 'sub-standard'.

One year later, PLI-1 informed the Treasury that Company A had failed to repay the loan and asked that the guarantee be honoured. PLI-1 was promptly paid HK$2 million from the public purse.

Yes, it is just another tale in the saga of Chief Executive Tung Chee-hwa's attempt to stimulate small and medium-sized enterprises (SMEs) by setting up a HK$5 billion loan guarantee fund for them. I cannot give you the names of the bank and the company as the Audit Commission did not reveal them.

But it was not the only such caper from PLI-1. A month after applying for this first guaranteed loan, it applied for another to Company D. It was a smaller guarantee, only HK$300,000, and Company D was in default on repayment within weeks. It took a longer time for PLI-1 to collect from the Treasury this time but collect it did.

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