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Financiers Ease The Path Ahead ( Banking, Finance, & Insurance )(HKTDC Hong Kong Trade Services, Vol 01,2001)

Vol 1, 2001


Banking, Finance, & Insurance

Financiers Ease The Path Ahead

Pitfalls Best Avoided

How To Secure Bank Financing

Committee Proposals Target SMEs' Needs


Financiers Ease The Path Ahead

Leading banks, suh as HSBC and Standard Chartered, dominate the cityscape in Central, Hong Kong.
STRATEGICALLY located and packed with infrastructure, Hong Kong continues to gain strength as a leading business and financial centre serving the needs of small and medium-sized enterprises (SMEs) - businesses with fewer than 100 employees.

Such businesses pack plenty of economic clout. Recently, financial enterprises have redoubled their efforts to attract SMEs through specifically tailored products and services.

"SMEs are the backbone of Hong Kong's economy. They are our large customers of tomorrow," says Brian Robertson, head of corporate and institutional banking at HSBC, the largest banking group in Hong Kong.

During the past year HSBC has opened a network of 15 Business Banking Centres staffed by specially trained personnel. "These centres are places where an SME owner can walk in and find someone to provide advice," Robertson adds.

Loans remain a major reason why SMEs approach banks. "That's usually the first thing on their minds, but they do need other services," says David Tam, assistant general manager and head of commercial banking at Hang Seng Bank.

At Hang Seng, SME loans range from HK$500,000 to HK$2m. "Before, SMEs were not quite sure that banks were as proactive on this type of lending. Some might have relied on their own resources, rather than go to a bank," says Tam.

If SMEs once were less knowledgeable about the requirements for financing, this is changing as banks promote their services more aggressively. For example, collateral is not necessarily required before SMEs can qualify for loans. However, disclosure of financial information, sufficient capital, good management and viable business plans are essential to determine if an SME is a good risk.

"About 70% of rejected SME loan applications would be eligible with more details on the SMEs' financial positions," says Tam. "We are bringing more awareness to new SME entrants because they seem to be asking us to tell them how they can borrow."

As SMEs become more sophisticated, banking services almost unheard of a few years ago gain wider acceptance. One is factoring, a service in which a bank makes a short-term loan to an SME against money the enterprise is owed from account receivables. The bank then takes over the job of collecting the outstanding payment from the SME's customer.

"Factoring was not common in the past, but now almost 20% of our SME customers ask for it," says Bethy Tam, general manager of business financial services, Hong Kong, for Standard Chartered Bank. The service liberates SMEs from collection headaches and provides immediate cash injections.

Banks target SMEs for new time-saving services, like phone-banking and Internet-banking.

Banks are enhancing financial services with online sites like this one from Hang Seng Bank at hangseng.com.
"Although 90% of Hong Kong SMEs still use branch banking services, we want to encourage those customers to use more automated channels," says HSBC's Asia-Pacific manager for commercial e-business Priscilla Mok.

"It is more convenient for customers and can improve their office efficiency. There are also cost savings. They need not visit bank branches, and those using phone or Internet banking receive discounts on fees."

The origins of Hong Kong's financial diversity actually took root in 1978 when the Chinese mainland's economy began opening, says Invest Hong Kong director-general Mike Rowse. Launched last year, Invest Hong Kong promotes foreign direct investment.

"Opening of the mainland economy led to enormous restructuring for Hong Kong. Whereas 23 years ago, our economy derived well over 25% of the GDP from manufacturing, now the figure is less than 6% and declining. Meanwhile, 85% is in services, including financial services," Rowse says.

Hong Kong plays a major role in raising private equity and venture capital, adds ABN-Amro Asia Capital Investment Ltd managing director Roger Marshall.

"Hong Kong is the only international gateway to the Chinese mainland and will remain so for many years. Its business and financial community must engage with the mainland to understand its policy directions and influence as much as possible to ensure Hong Kong's resources are indispensable to businesses entering the mainland," Marshall says.

Standard Chartered Bank regional chief economist Kwok Kwok-chuen adds, "Mainland entry to the World Trade Organization (WTO) will generate new opportunities. Hong Kong is already the mainland's largest port and a substantial trade centre. As the mainland engages in more trade within WTO, Hong Kong will benefit."

He believes WTO entry will generate new opportunities not only for SMEs, but also for financial and professional firms supplying trade services.

Rowse says the Chinese mainland's WTO entry is merely a milestone on that financial-services journey beginning in 1978. It is not a new direction, but simply continuing in the same direction with a bit of acceleration, some rules and discipline.

"Among companies going directly into the mainland, 90% lose money while 90% of those going via Hong Kong make money. That puts Hong Kong's role in perspective," says Rowse.

WRITTEN BY Aravind vidyadharan and andrea pawlyna

Useful Contact(s)

Hong Kong Association Of Banks
Tel: 2521-1169
Fax: 2868-5035
E-mail: hkab@pacific.net.hk
Website: www.hkab.org.hk

Hong Kong Export Credit Insurance Corp
Tel: 2723-3883
Fax: 2722-6277
E-mail: info@hkecic.com
Website: www.hkecic.com

The Hong Kong Federation
Of Insurers
Tel: 2520-1868
Fax: 2520-1967
E-mail: hkfi@hkfi.org.hk
Website: www.hkfi.org.hk

Office of the Commissioner Of Insurance
Tel: 2867-2565 (hotline)
Fax: 2869-0252
Website: www.info.gov.hk/oci


Pitfalls Best Avoided

LETTERS of credit (L/C) are a vital business tool. Asia Commercial Bank operations manager Peter Yeung proffers these tips to ensure transactions involving L/Cs proceed smoothly:

  • Instructions must be complete. Descriptions of goods, inspection certificates, customs invoices and certificates of origin must be clear and specific to avoid future arguments.

  • Be certain to specify if the L/C is payable on sight or at maturity.

  • Pay attention to the amount and quantity of goods. Is any percentage of tolerance allowed that must be specified in the L/C?

  • Shipments from Asian countries usually arrive in Hong Kong before the shipping documents. In such cases, shipping guarantee facilities should be arranged beforehand.

  • Specify who is to bear the charges other than the bank issuing the L/C. Normally charges by banks issuing L/Cs are paid by applicants and charges outside issuing banks are paid by beneficiaries.

  • Specify who is responsible for insuring goods during shipment and what risks are covered.

  • If L/C amounts are in a foreign currency, the exchange rate may be fixed with a banker to avoid foreign currency risks.

  • For foodstuffs requiring refrigeration, the temperature under which containers are shipped must be specified in the L/C.

  • Be careful to avoid contradictions in the terms and conditions stated in L/Cs. For example, shipment dates must not be later than an L/C's expiry date.

How To Secure Bank Financing

TOO often small and medium-sized enterprises fumble when seeking bank financing. The problem is often lack of insight and failure to observe basic rules.

The first rule is that business people must supply comprehensive information to help the bank gain a complete picture about the business and people operating it. This requires the following:

  • A company brochure detailing the type of company and its history, products, target markets, production processes and manpower;
  • A personal profile outlining the applicant's background and experience;
  • Audited and up-to-date company annual reports for the previous three years;
  • Comprehensive analysis of the relevant industry, with market positioning of the company's products, competition, trends and value-added associated with the company's products;
  • Lists of the company's suppliers and buyers or clients, including terms for buying raw materials and selling finished goods; and
  • Useful trade references, such as any industry recognition or market awards.

All requests for financing need clear explanations. Applicants must highlight: specific purposes in seeking money; a breakdown of the total required and intended uses; role of the financing in business strategy; anticipated gross and net profits; impact of additional financing on cash flow; critical success factors and risk precautions; sources for repayment; details of the applicant's equity share; and collateral or security guaranteeing the loan.

Applicants must build a mutually beneficial relationship with the bank. This requires frankness and transparency, treating the bank as a business partner. Companies must ensure regular contacts to provide the financing bank with consistent and positive accounts of operations.

A final note of caution is that SMEs should adopt a conservative approach toward risk and never overborrow.

Committee Proposals Target SMEs' Needs

A high-profile committee has filled English and Chinese versions of its report with recommendations on assisting SMEs.

A SMALL and Medium Enterprises Committee recently completed six months of research, discussion and consultation before making a comprehensive list of recommendations, all supporting the long-term development of SMEs. Hong Kong chief executive Tung Chee-hwa appointed the committee in late 2000.

The group recommended four funding schemes:

  • Business Installations and Equipment Loan Guarantee Scheme: HK$500m to help SMEs secure loans for necessary business installations and equipment;
  • Development Fund: HK$200m to subsidize projects enhancing SME competitiveness;
  • Training Fund: HK$300m to subsidize SME employee training and HK$100m for employers to attend training courses; and ?
  • Export Marketing Fund: HK$200m to subsidise SME participation in export promotion activities.

In addition, the committee made recommendations in six other areas: business environment, financing, corporate governance and culture, human resources, technology application and market expansion.

"We firmly believe SMEs will play an increasingly important role in the new economy. Therefore, it is necessary to support their healthy development," says committee chairman Chan Wing-kee.

The group's full report appears online at: www.gov.hk/tid/support/sme_report.htm.

On 25 September, the committee recommendations held the spotlight at an SME Finance Net exhibition and seminar organized by the Hong Kong Trade & Industry Department and the Hong Kong Productivity Council's SME Centre.

According to Hong Kong Equipment Leasing Association chairman Percy Lau, "It is gratifying that the long term importance of SMEs to Hong Kong's development is being closely considered in a practical manner. Our members certainly welcome these initiatives."

More information is available by calling the committee secretariat at 2398-5144.

Useful Contact(s)

Small and Medium Enterprises Information Centre
Hong Kong Trade & Industry Department
Tel: 2398-5133
Fax: 2737-2377
E-mail: smeenq@mail.gcn.gov.hk
Website: www.sme.gcn.gov.hk

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