Detailed plans are now in progress for the establishment of a commercial credit reference agency in Hong Kong. A key objective is to improve access to loans for the small and medium enterprises that play a key role in Hong Kong's economy.
We often hear small and medium enterprises (SMEs) complaining about the difficulties they experience in trying to borrow money from banks. Some people feel that banks' lending policies to SMEs are too conservative, in their reliance, for example, on the availability of collateral. The decline in property prices in the last few years has not made it easier for SMEs to obtain bank lending. In an economy where SMEs account for over 98% of all business establishments and provide jobs to about 1.4 million people, their well-being is a matter of vital importance to Hong Kong's economy. This is why the Government has worked closely with the SME sector on a variety of measures to assist their development. There have been a number of worthwhile suggestions, but many people believe that one of the best ideas is to set up a Commercial Credit Reference Agency (CCRA), which would keep track of the credit standing of SME borrowers, to strengthen the efficiency of SME financing.
Many research studies indicate that by enhancing market transparency, commercial credit reference agencies outside Hong Kong have helped to reduce banks' bad debts and increase credit availability. Having studied its potential benefits, the Hong Kong Monetary Authority put out a proposal to establish a CCRA for public consultation in July 2000. From the views expressed, there was support from both the banking and corporate sectors for setting up a CCRA. On 25 April 2001 the Legislative Council also passed a motion in support of expediting the establishment of a CCRA. Many believe that as SMEs' transparency would be enhanced, the scheme would help to reduce banks' reliance on the availability of collateral. The key question, however, is how to draw up a scheme that can meet the concerns of different market participants. We have convened a Working Group comprising representatives from the banking and SME sectors, as well as interested bodies such as the Privacy Commissioner for Personal Data, to consider the arrangements for the scheme in more detail.
I would like to focus on two issues here that are directly relevant to SMEs. First, it has been argued that, by keeping records of their credit standing, the CCRA would undermine the commercial privacy of individual SMEs. Secondly, fears have been expressed that the establishment of a CCRA might have a counter-productive effect, in that some banks may refuse lending to SMEs that have a "bad" credit history in the CCRA.
These concerns obviously need to be carefully addressed, but they do not seem insurmountable. Concerns about the loss of privacy could be addressed by requiring the CCRA and its users to comply with regulations designed to safeguard data privacy. Such regulations may include limits on access to credit files, elimination of one's credit history after a set period of time, and the right to access, check and correct one's own file. The Working Group has been consulting the Privacy Commissioner and studying comparable overseas practices with a view to formulating a data protection framework under the scheme.
On potential threats to financially weak SMEs, we should really think hard whether a lack of transparency designed to protect these enterprises is the best way to promote sustained growth in SME finance. As mentioned, there is general agreement that a CCRA would increase credit availability to the SME sector as a whole. But to alleviate the concerns of some SMEs, it has been proposed that the CCRA should collect SMEs' data only from its start-up date onward. In other words, any default history of SMEs prior to the start-up date would not be disclosed to the CCRA: some people consider that this would be a fairer arrangement to SMEs. The Working Group has been giving some thought to this issue.
Needless to say, there are many challenging issues facing the Working Group. Other key issues being considered include the mode of participation by authorized institutions, ownership and regulation of the CCRA, and the scope of coverage of the scheme. Suffice to say that the Working Group is making good progress to address these issues and hopes to produce detailed proposals regarding the scheme within this year for further consultation with the relevant parties, including the Legislative Council. In the implementation of this scheme we shall continue to count on the support of the SME sector.
Simon Topping
Executive Director, Banking Policy
28 June 2001
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