Surveys on the financing situation of small and medium-sized enterprises

The Hong Kong Monetary Authority (HKMA) today (23 June) released the findings of two surveys on the financing situation of small and medium-sized enterprises (SMEs). The first survey, conducted in late 1999 covers 30 SMEs. The second survey, conducted in March 2000 covers eight banks and four SME associations in Hong Kong. The survey results shed light on the financing situation of SMEs in the aftermath of the Asian financial crisis.

In line with general perceptions, the survey results suggest that there is a gap between the demand for bank credit by SMEs and the supply of funds by banks. In general, the availability of bank financing is considered inadequate by SMEs. This is evidenced by their heavy reliance on personal savings as the major funding source for starting up and expanding business.

The SMEs surveyed perceived that banks generally adopt conservative lending policies and rely mainly on the availability of collateral. The fall in property prices during the Asian financial crisis made it difficult for SMEs to obtain bank finance.

In line with the views expressed by SMEs regarding banks' credit policies, the banks interviewed acknowledged that they had adopted a more conservative lending stance toward SMEs than toward large companies because of a number of unfavourable characteristics of the SME loan market. These include: relatively high delinquency rates; inadequate disclosure of financial and other information; low transparency of operations and poor accounting standards; lack of discipline in the use of credit facilities; and the low level of cost-effectiveness of such lending.

Banks also admitted the importance of collateral in SME lending. However, they rejected claims that it is the sole determinant. Their generally heavy reliance on collateral is partly a practice developed in the past years when the property market was booming, and partly a response to the characteristics of the SME loan market.

Banks and SME associations appeared to be somewhat more optimistic during the March survey about the short-term prospects for an increase in bank credit than were the SMEs represented in the survey carried out in late 1999. The difference may mark some turnaround in the financing situation of SMEs as time passed, although the different composition of the samples may also have had an effect. It is encouraging to note that banks interviewed in the March survey indicated a neutral to positive attitude in their future lending stance.

Some banks revealed that they were very aware of the difficulties faced by SMEs and had already taken active steps to improve services to SMEs. They had either started increasing their lending to SMEs since last year or set up dedicated business units focusing on the SME loan market.

While there was no consensus among the survey respondents on the means to relieve the financing situation of SMEs, a number of suggestions were made by respondents to help remove the hindrances for bank lending to SMEs and enhance the role of market forces. These include: setting up a Credit Reference Agency for SMEs; disseminating information about the SME loan market; promoting adequate disclosure of financial and other information of SMEs; enhancing SMEs' accounting standards; and developing and using a credit-scoring system in the SME loan market.

A report on the findings of the two surveys on the financing situation of SMEs conducted by the HKMA is available from the HKMA, 30/F, 3 Garden Road, Hong Kong. The full text of the report is also available on the HKMA website.

For further enquiries, please contact:

Thomas Chan, Senior Manager (Press) at 2878 1480 or
Caitlin Wong, Manager (Press) at 2878 1687

Hong Kong Monetary Authority
23 June 2000

Attachment:
Report
Annexes I and II
Annex III