Small and medium enterprises (SMEs) need a market-based loan guarantee scheme much before the current arrangement is phased out, said a leading think-tank in the city. A study released Friday by the Bauhinia Foundation Research Centre has insisted that major financial institutions, not the government, guarantee loans for these SMEs.

"With a third party serving as a guarantor for bank loans, the scheme is more flexible in terms of coverage, maximum loan amount as well as guarantee amount and limit," said Bauhinia Foundation Chairman Anthony Wu. "It also means more choices for financing in the city.

The Hong Kong government launched the Special Loan Guarantee Scheme (SpGS) in December 2008 to provide an 80 percent guarantee for commercial loans granted by participating lending institutions (PLIs) to eligible SMEs. That was part of its relief measures to help SMEs facing liquidity problems during the global financial crisis.

In April this year, it extended the application period for the special scheme by another six months, to December, in a bid to help SMEs consolidate their business at a time when the economy has just begun to recover.

As early as 2001, the Hong Kong government launched an SME Loan Guarantee Scheme (SGS), which guarantees SME loans up to HK$6 million with a maximum guarantee period of five years.

"The scheme can supplement the existing SGS, and form part of Hong Kong's long-term SME loan guarantee mechanism," said Wu.

Wu said the choice of guarantor is crucial in the new arrangement, for its sold financial strength, high credit rating as well as sufficient guaranteed loans will be essential for the new scheme to be viable.

He believes Hong Kong Mortgage Corporation (HKMC), a public limited company wholly owned by the government through the Exchange Fund, is one of the best choices.

"Since HKMC is a self-financing company, its guarantee will not involve any subsidy from taxpayers. Moreover, credits from its government background will encourage banks or lending institutions to sustain their scale of financing for SMEs in Hong Kong," said Wu.

In Hong Kong, SMEs account for over 98 percent of all the enterprises, provide employment opportunities for 1.2 million works - almost half of the total working population.

The SpGS has helped stabilize about 300,000 jobs, contributing to "supporting enterprises and preserving employment", the government said in April.

The new scheme will cover all non-listed enterprises and SMEs in the city, and is designated to include both term loans and revolving facilities to broaden support for SMEs, with the guarantee coverage ratio ranging from 50 percent to 70 percent.

China Daily

(HK Edition 09/04/2010 page2)