Legislative Councillor’s Column – The Approval of Application for Special 100% Loan Guarantee

Translated version of Capital Weekly Legislative Councillor’s Column

The Approval of Application for Special 100% Loan Guarantee

The economy and the business environment of Hong Kong have been worsening over the past few years. The first quarter of 2018 saw the gross domestic product of Hong Kong, in real terms on a year-on-year basis, record a remarkable 4.5% growth. It, nevertheless, slipped to a meagre 1.1% in the fourth quarter of the same year, owing to the flare-up of China-US trade war. Amid so many negative factors encircling 2019, negative growths were recorded, not only in the third quarter but also the one that followed. Overall, the economic output of Hong Kong, now moving into a recession, dwindled by 1.2% in 2019, the first setback since the global financial tsunami in 2009.

To help enterprises cope with the potential financial difficulties, as a result of the economic downturn, the government brought in the 90% Guarantee Product, under the Small and Medium-sized Enterprises (SME) Financing Guarantee Scheme, in December 2019. It was designed by Hong Kong Mortgage Corporation Insurance Limited (HKMCI) to extend 90% credit guarantee to the local SME, some of which may have less experience or, whose operation scales may be small, as well as professionals wishing to run businesses of their own. The loan for each application is capped at $6 million, with repayment period up to five years.

The outbreak of the novel coronavirus pandemic in 2020 has further crippled the already ailing economy of Hong Kong. The income of many industries has drastically gone down, causing liquidity difficulties. In view of the severe economic environment, the government has launched the Special 100% Loan Guarantee, under the SME Financing Guarantee Scheme, for which applications will be open for six months, which will undertake up to $20 billion credit guarantee. The loan covers the payroll and rental expenses of an eligible applicant for up to six months, with $2 million being the upper limit and the longest repayment period three years. An optional principal moratorium for the first six months is also available.

The objective of the Special 100% Loan Guarantee is to help the affected enterprises weather the pandemic outbreak, hoping to eventually reduce the number of closures and layoffs. Applications are also open even to the enterprises which have applied for the SME Financing Guarantee Scheme. Unlike before, the Product, fully guaranteed by the government, will be booked as loans of Hong Kong Mortgage Corporation after bank drawdown. When processing applications, the participating banks will simplify the procedures as much as possible such that they will focus on whether applicants meet the criteria so as to expedite the release of loan. Applicants need not worry about that the examination by the banks will be too stringent. The difference between the 90% Guarantee Product and the Special 100% Loan Guarantee lies not only in the loan ceiling but also the annual interest rate – the former’s maximum set at 8% to 10%, while the latter at 2.75%. The loan cannot, however, be used to repay, consolidate or restructure the existing debts, if any, to the participating financial institutions.

The pandemic being on the run, many SME, it is pointed out, are struggling for survival and hence relief measures are urgently needed. It is believed that the timely introduction of the Special 100% Loan Guarantee by the government, thanks to their prudence, will provide the necessary help to the hard hit SME to weather the coronavirus outbreak.