As the tax-loan season gets underway, small- and medium-sized banks are sacrificing profit margins in a bid to gain larger slices of the market. Smaller banks are keen to attract customers for tax loans in the hope they will be able to sell them other services in the future, according to market watchers. Another factor is that this year the tax-loan pie is expected to be much bigger than previously, as the economic slowdown causes the majority of companies in the SAR to slash year-end bonuses. Workers usually pay their taxes from their bonus payments. Bank of East Asia has set the benchmark by charging a low annual interest rate of 5 per cent for a loan of HK$100,000. However, this facility is only being offered to privileged customers - those with good bank records. Wing Hang Credit is not far behind, charging privileged customers an annualised percentage rate (APR) of 5.24 per cent for loans of HK$100,000. For those applying for higher loan amounts - between HK$300,001 and HK$400,000 - the interest rate is as low as 4.54 per cent per annum. 'We can't earn much by offering a rate of 4.54 per cent . . . The margin of the loan is only about 1.5 per cent,' said Checkley Sin Kwok-lam, director and general manager of Wing Hang Credit. Bigger banks, however, have made it clear they are not joining the race for small tax-loan customers this year. For example, for a loan of HK$300,000, HSBC's offer to their preferential customers is 7.79 per cent per annum. Mr Sin said the bank wanted to cultivate a group of loyal customers by offering them a good tax-loan package. He said once the customer base was established, the bank might offer other products at a bigger margin. 'Most tax-loan customers are good customers. By attracting them to our tax loan, we hope we can also introduce them to other products,' Mr Sin said. Bankers admitted competition in the tax-loan market was sharp this year. Although people might apply for loans above their tax amount, they were expected to be more cautious in spending. While American Express said it expected a 5 per cent increase in the number of people applying for tax loans this year, Bank of East Asia's Emily Liu Yin-nai was not as optimistic. She expected the tax-loan market to shrink by 10 per cent to 15 per cent in terms of loans sought. Mr Sin said that because of tough competition this year, small- to medium-sized banks would have to adopt a flexible policy in order to survive. 'Offering a low interest rate is our marketing strategy. Apart from building up a loyal customer base, we want to build up our brand. We hope people will think of us when they think of tax loans,' he said. Available figures show the rate of bad tax loans is relatively low when compared to other unsecured loans. The write-off rate for tax loans from Wing Hang is about 0.4 per cent, compared to the overall rate of 3 per cent for other banks. Apart from competitive interest rates, some small- and medium-sized banks are providing packages with different specialities to attract customers. Katty Leigh Hing-yee, vice-president of marketing and planning at Bank of America, said the bank offered various choices to customers. Borrowers could choose to spend part of their loan on daily shopping through purchasing coupons from selected merchants like Wellcome supermarket and furniture chain Ikea, with which they could enjoy a lower rate and a cash rebate. 'We let our clients pick up the interest rates. The merchants we made arrangements with are those which sell daily necessities. Our clients may find the coupons useful and, on the other hand, they can enjoy a lower rate,' Ms Leigh said. Bank of America has also simplified the application procedures in order to attract more customers. Potential clients can even apply for loans by telephone. 'When people shop for a tax loan, they look at the interest rate and application procedure. They want a bank which provides a convenient application procedure,' Ms Leigh said. Bank of East Asia is offering the most generous rate to its privileged clients. The APR for a loan of HK$50,000 is as low as 5.48 per cent for privileged customers, compared to 8.2 per cent for general customers.