SME loan guarantee scheme a bad idea from the start

PUBLISHED : Monday, 17 March, 2003, 12:00am
UPDATED : Monday, 17 March, 2003, 12:00am

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.

The reason it took longer is that PLI-1 had to answer a few questions. It turns out, according to the Audit Commission, that PLI-1 had offloaded a restructured loan into the guarantee scheme. It should have been no surprise. PLI-1 had rated this loan as 'high risk'.

Then there was PLI-2, which not only offloaded an existing bad loan on to the guarantee scheme while purporting that the borrower was creditworthy but allowed the borrower to draw the money down two days before the guarantee was approved. Yes, PLI-2 collected from the Treasury.

PLI-2 did the same thing only months before, except on that occasion, it allowed the borrower to draw down the cash five days before the guarantee approval and it was a larger loan. The loan was just as duff, however.

It is water under the bridge now as the entire HK$5 billion in the SMEs scheme has been used up but the Audit Commission has nonetheless proposed guidelines to stop the likes of PLI-1 and PLI-2 from raiding our pockets in future should a similar scheme be attempted.

These guidelines are what you would expect. The relevant government departments should be wider awake to the danger of bad loans being offloaded into guarantee schemes, should keep an eye out for related party deals and should not pay cheaters.

They also miss the point. The real flaw in the SMEs scheme lay not in how it was carried out but in its conception. If the banks consider any particular SME a good risk, they will lend money to it. They are not short of the stuff. A special guarantee scheme therefore attracts bad risks.

It is the age-old market lesson. If you try to help any market with special measures that are not based on seeking a return on investment, that market will repay your kind deed by clobbering you over the head. The road to hell is still paved with good intentions.

TALKING OF GOOD intentions, the people who cobble international accounting standards together were undoubtedly well intended when they decided that property companies with freehold land need not book revaluation differences through their profit and loss (P&L) accounts annually but those with leasehold land banks should do so.

They forgot Hong Kong where property companies operate with long-term leasehold land. Thus we had Hongkong Land last year forced to book a revaluation deficit as a loss in the P&L account. What madness. The earnings performances of our property companies will take top prizes at international yo-yo competitions if this standard dictates how they be reported. Their P&L accounts would be utterly useless.

Fortunately, the Hong Kong Society of Accountants has finally recognised how silly this is and has announced that it will not comply. We go back to the old standard.

Revaluation differences will be reflected in the balance sheet but only go through to the P&L account when realised. What took you people so long?