Small and medium-sized companies are continuing to suffer from a credit crunch as banks remain conservative in lending despite the recovering economy, Hong Kong Monetary Authority research has shown. The HKMA yesterday released the results of two surveys showing there had been little easing in the tight lending environment for small and medium-sized enterprises (SMEs) since the Asian financial crisis. With hundreds of thousands of SMEs accounting for a large chunk of the SAR's economic activity, the credit crunch has acted as a drag on economic recovery in Hong Kong. The problem was considered so severe that Chief Executive Tung Chee-hwa appealed directly to banks to ease their purse strings during his Policy Address in October. Mr Tung called on banks to stop relying on property as collateral and look at the track records and business prospects of companies when making loans to SMEs. However, half the firms surveyed by the HKMA in December and March blamed 'insufficient bank finance' as the leading constraint on their operations. Respondents called for the setting up of a credit reference agency to collect information on small firms, saying this would help banks make lending decisions. The HKMA conducted the two surveys to learn about the impact of banks' credit tightening during the Asian financial crisis. The first survey was conducted on 30 SMEs, while the second was of eight banks and four SME associations. 'The survey results suggest that there is a gap between the demand for bank credit by SMEs and the supply of funds by banks,' the HKMA said yesterday. 'In general, the availability of bank financing is considered inadequate by SMEs.' As a result, companies had to rely heavily on personal savings to cover the costs of business start-ups and expansion. More than two-thirds of 30 companies surveyed said personal savings were the sole source of start-up funding for their businesses. Banks were continuing to insist mainly on property as collateral, the SMEs surveyed said. The fall in property prices during the Asian financial crisis meant it had become more difficult for small companies to obtain bank loans. Banks surveyed admitted they had adopted more conservative lending policies towards small firms than large enterprises. This was because of the higher bad-debt ratio for loans made to SMEs than those to larger players, banks said. In addition, they said many SMEs had low transparency of operations and poor accounting standards, while some lacked discipline in their use of bank credit facilities. These factors had discouraged banks from making loans. Banks defended their reliance on property collateral, saying it was a practice that had been developed in past years when the property market was booming, and had been widely used in the SMEs loan market. Although property collateral was an important factor, it was not their only consideration, the banks said. Banks and SME associations were more optimistic during the March survey, saying they believed banks would increase their lending to the SMEs in the short term. 'The difference may mark some turnaround in the financing situation of SMEs as time passed,' the HKMA said, although it pointed out the surveys were based on different samples. In the March survey, some banks said they were aware of the difficulties faced by SMEs and had already taken active steps to improve services to them. Both SMEs and banks offered suggestions to improve the situation. Besides supporting a credit reference agency for SMEs, they also called for improved disclosure and accounting standards in the sector. A credit-scoring system, which ranked the credit quality of companies, would also encourage banks to make loans to SMEs.