Hong Kong Mortgage interest rate for loans to start-ups simply too steep
While the government-owned Hong Kong Mortgage Corp (HKMC) will have some enhancements from June, it still has not gone far enough to encourage people to set up their own business.
It has not really tackled the real problem of the scheme and that is the very high interest rate of 9 per cent a year it is charging people.
The microfinance programme was launched in 2012 as a three year pilot scheme to run until June with the intention of offering loans people HK$300,000 each in loans at 9 per cent interest so they can set up their own business.
The HKMC announced last week the scheme will be extended for another three years through June 2018 while the total amount of lending in the plan now extended to HK$200 million, from HK$100 million.
The plan has not been really helpful. The extension is only aimed at keeping the scheme alive.
The increase of the top end HK$100 million is not helpful neither, as the current HK$100 million has not yet been used up. Until now, there are only a total of HK$37.22 million loans which have been offered. There is no urgent need to raise the total loan cap.
There is another major enhancement that borrowers with a good track record for two years will be able to apply for a further advance that would double the current individual loan to HK$600,000. The interest rate for the further advance will be 8 per cent, compared with 9 per cent under the current scheme.
This may help existing borrowers, but for any new borrowers, 9 per cent is a rate that is simply too high.
This rate is lower than the credit card interest rate at 20 to 30 per cent per year or a personal loan where the rate is 12 to 18 per cent. But compared with tax loans where the rate is 3 to 4 per cent a year and some high credit quality clients at 5 to 6 per cent, the 9 per cent is too rich.
To really help people to set up their business, the government agency need to offer real low interest rate lending for people since they could not get cheap bank loans and banks would shy away from lending because it is too risky given the failure of many new businesses.
An HKMC executive defended the 9 per cent interest rate is needed as the default rate for the scheme over the past three years stood at 6 per cent.
There may be defaults but there is also a chance to lend to someone who may create the Hong Kong version of Alibaba, Tencent or Facebook.
In addition, the HKMC has already had a very serious vetting process where in over 300 applications, about half the cases were rejected as the applicant’s business plan was not considered valid or feasible.
This mechanism should be enough to screen out some poorly planned business plans. For the successful applicants, the agency should offer them cheaper loans to help them get going.