Months after the outbreak of the coronavirus, the pandemic is still not yet under control in most of the world. While the pandemic situation in Hong Kong seems to have subsided recently, there remain sporadic cases with unknown sources of infection. And a new wave of infections is appearing in Europe and the US. It is likely that we will have to live with the virus for a prolonged period before an efficacious vaccine emerges and becomes widely available.
The outbreak has posed unprecedented challenges to Hong Kong’s economy. Local economic growth contracted by 9% year on year in the second quarter, while the unemployment rate rose to near a 16-year high. Almost all sectors have been hit by the pandemic. However, compared with large corporates with more resources, small and medium-sized enterprises (SMEs) are bearing the brunt of the slowdown. SMEs form an important pillar of our economy, accounting for more than 98% of businesses in Hong Kong and about 45% of total employment in the private sector. Faced with the current economic downturn, SMEs are operating under tremendous pressure. A stable flow of credit is therefore particularly important to them.
Easing the cash-flow pressure on SMEs
Over the past few months, we have been closely coordinating with the banking sector and encouraging banks to continue providing credit by making good use of their lending capacity so as to help businesses overcome these difficult times.
The HKMA has announced earlier the extension of the Pre-approved Principal Payment Holiday Scheme launched in May this year by six months to April 2021 (while repayment of trade loans would be deferred by 90 days). In other words, SMEs can have a principal payment holiday of up to one year in total, greatly relieving their financial difficulties. More than a hundred banks are participating in the Scheme. According to the statistics they provided, the banks had approved some 49,000 applications from corporate customers for principal payment holidays and other relief measures by the end of September 2020, involving an aggregate amount of around HK$590 billion.
The Hong Kong Mortgage Corporation Limited (HKMC) has also decided to extend the moratorium on principal repayments for the 80% Guarantee Product and the 90% Guarantee Product under the SME Financing Guarantee Scheme (SFGS) by six months to the end of March 2021, bringing the maximum duration of the principal moratorium from 12 months to 18 months. A total of over 3,700 applications for these two products were approved in the first nine months of this year, involving about HK$11 billion.
As for the new Special 100% Loan Guarantee launched in April this year under the SFGS, the HKMC has recently raised the maximum loan amount per enterprise from the equivalent of six months of employee wages and rents to 12 months (capped at HK$5 million), with the maximum repayment period extended from three years to five years. Since its introduction, the Special 100% Loan Guarantee has provided much-needed loans to over 10,000 companies, involving a total loan amount of more than HK$27 billion.
These relief measures have been implemented promptly and effectively, thanks to the concerted efforts of the banking sector and the HKMC in delivering the measures and processing the large number of applications in a speedy and flexible manner. We are, however, mindful that these are extraordinary measures taken at an extraordinary time. We will review the case for extension of the various measures from time to time, with the overarching objective of maintaining banking stability.
Better use of data to help SMEs obtain loans
Meanwhile, we need to consider how to improve SMEs’ access to financing in the long run. SMEs, especially those that are smaller or have a shorter operating history, tend to meet with more difficulties than big corporates in securing a loan. When considering whether to extend a loan, a bank will first require the applicant firm to provide its financial information, such as financial statements, so that the bank can assess the firm’s repayment ability and hence control credit quality. However, such financial data often has a time-lag issue and cannot provide a complete picture, making it difficult for banks to accurately assess the SMEs’ repayment ability. Thus, as part of risk management, banks tend to adopt a more prudent stance in handling SME applications and require SMEs to provide collateral or guarantees. This poses a big challenge for SMEs in securing loans.
Data is king in the digital era. There has been an emergence of a wide array of tech firms that thrive on the innovative and even revolutionary use of data science. Indeed, the benefits and huge potential of data analytics have been brought to the fore because of the pandemic. Similarly, to address the financing challenge of SMEs, data is the key. If there is an easy and effective way for SMEs to share their up-to-date business data, such as monthly or even daily trading and turnover statistics, banks can have a more thorough understanding of the loan applicants’ latest business activities and prospects. This will enable banks to perform more precise and objective credit assessments. And that, in turn, will help SMEs obtain bank financing more easily and quickly.
In fact, the market does not lack such valuable data, but the information is simply scattered across different platforms. What is missing is a centralised, efficient and secure channel whereby SMEs can avail themselves fully of those data in supporting their loan applications. On the other hand, as we all know, the digitalisation of banking services is a major trend. Since the HKMA’s launch of a series of Smart Banking initiatives in 2017, there has been significant progress in the adoption of financial technology (fintech) in banking services and operations. Many banks have started embracing new technologies such as artificial intelligence and cloud computing. However, without the support of data, the benefits of even the best technologies cannot be fully exploited to help finance SMEs.
Over the years, the HKMA has developed sound financial infrastructure focusing on the clearing and settlement of funds and securities. To address the long-standing pain points of SMEs in obtaining bank financing, we need to expand our financial infrastructure so that SMEs can share their data with banks at their discretion. With access to more comprehensive and timely data, banks can apply data science to conduct a detailed analysis and assessment of an SME’s financial conditions. The result is that banks can better manage their risks while also helping SMEs to get a loan more easily. It is a win-win outcome for both banks and SMEs.
We are fleshing out the details of this new idea and hope to share more with you soon.
Hong Kong Monetary Authority
27 October 2020