Home News In 2022, Defaults on Government-Guaranteed Loans by Struggling Hong Kong SMEs Will Increase Sixfold to HK$2.46 Billion

In 2022, Defaults on Government-Guaranteed Loans by Struggling Hong Kong SMEs Will Increase Sixfold to HK$2.46 Billion

In 2022, Defaults on Government-Guaranteed Loans by Struggling Hong Kong SMEs Will Increase Sixfold to HK$2.46 Billion

A Hong Kong government-guaranteed loan scheme to help small and medium-sized enterprises (SMEs) weather the Covid-19 pandemic saw repayment defaults surge six-fold to HK$2.46 billion (US$313 million) last year from 2021, with worse expected.

There were HK$970 million loans in default in the first two months of this year, almost two-fifths the total last year and more than double 2021’s HK$420 million, a Post review of government replies to the Legislative Council’s Finance Committee earlier this month found.

Borrowers have urged the government to extend the holiday period for repaying the principal sum of their loans, or many more companies could be in trouble.

The Special 100% Loan Guarantee Scheme was introduced in April 2020 to ease SMEs’ liquidity crunch during the economic slump brought on by the pandemic, with the government guaranteeing lending by banks.

It allowed each SME in Hong Kong to borrow up to HK$9 million at an interest rate of the prime rate minus 2.5 per cent, or at 3.375 per cent. Borrowers could opt to delay repaying the principal sum, with a holiday period of up to 42 months.

The default situation reflected the financial plight of many of the city’s 360,000 SMEs which account for 98 per cent of businesses and employ 44 per cent of the private sector workforce.

Hong Kong Chinese Manufacturers’ Association president Allen Shi Lop-tak said many manufacturers had been short of orders since the middle of last year, and the slight improvement seen in recent months would likely only gather pace in the second half of the year.

“Support from the government and financial sector is critical as many SMEs still face cash flow challenges,” he said.

Even if the holiday period for repaying the principal sum was phased out, he said, SMEs would need some sort of replacement measures to keep the loan default rate low.

He was among business leaders who met Beijing official Xia Baolong, director of the State Council’s Hong Kong and Macau Affairs Office, on April 17. Others present said Xia expressed concern about the city’s SMEs.

As of last month, about 61,400 applications for a total of HK$124.3 billion had been approved under the loan guarantee scheme, according to the government. More than half had a repayment period of eight to 10 years.

Borrowers must apply to delay their repayments on the principal sum. Last October, the deadline for applications for the repayment holiday was extended to the end of June this year.

The Hong Kong Monetary Authority said last October that after five extensions, the holiday period would “have to come to an end eventually”.

A spokesman of the Commerce and Economic Development Bureau on Friday said the principal moratorium arrangement was under review as the government closely monitors the scheme’s operations.

Danny Lau Tat-pong, owner of a Hong Kong-based construction materials manufacturing business, said last year was rough as the property market squeeze in mainland China wiped out a hefty chunk of orders from there. Orders from Hong Kong clients also fell.

“We lost quite a bit last year,” he said.

Because orders from construction projects were placed months in advance, he said, business performance often lagged behind the economic cycle and deals currently in the pipeline would take months to materialise.

He declined to say how much he borrowed, but his company was among 42,940 borrowers who chose to delay repayments on the principal sum.

His company had been repaying around HK$13,000 a month so far, but from July, that would jump to about HK$63,000 a month when repayments on the principal sum were due.

Even though most businesses were still in their holiday period and only paying interest so far, bad debts have already begun stacking up.

Lenders reported 1,945 cases of default as of February, with 433 in the first two months this year, compared to 1,241 for the whole of last year.

The government told the legislature that lenders would try to work out a debt restructuring plan with the SMEs that defaulted on loans totalling HK$3.86 billion from April 2020 to February 2023.

The default rate of 3.2 per cent was significantly lower than the government’s earlier estimate of 25 per cent, but Lau cautioned that the rate could go up “quite dangerously” if the holiday period for the principal sum was not extended.

“Some businesses only managed to stay afloat without making a loss. They have no profits to spare to repay the principal sum,” said Lau, who is the honorary chairman of the Hong Kong SME Association.

Howard Wong, general manager of a hot drinks company that supplies city restaurants, declined to reveal how much he borrowed but hoped the holiday period would be extended.

Although his company’s recent sales had returned to levels last seen in 2018, he said many of his catering sector clients were struggling with high food and staff costs and there was a risk that some might default on paying him.

Wong, who chairs the youth committee of the Hong Kong Chinese Manufacturers’ Association, said: “Revenue gains don’t mean good gross profits. Business might be growing, but so are the costs.”

Associate Professor Billy Mak Sui-choi of Baptist University’s department of accountancy, economics and finance, said SMEs that chose to delay repaying the principal sum were essentially snowballing their overall interest expense in the long run.

He said the merits of introducing the loan scheme during the pandemic would outweigh the burden on public finances in coming years if some borrowers defaulted.

Even if some businesses “only had their closure postponed”, their workers had benefited by remaining employed through the pandemic and would be looking for new jobs during a recovery.

“The government’s objective for the scheme was not to lend money, but to support businesses. This objective is already met because these businesses and the jobs have survived for three years,” he said.

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