The Government launched economic relief measures, including the Special Finance Scheme, between August 1998 and April 2000 to help small and medium enterprises (SMEs) obtain loans from participating lending institutions to cope with the liquidity crunch arising from the Asian financial crisis.

About 10,000 SMEs have secured loan facilities of about $9.2 billion from these institutions, involving $5.8 billion in government guarantees.

The Special Finance Scheme was based on two fundamental principles, namely that it would be market-driven - institutions assess the applicants' creditworthiness - and risks would be  shared. Institutions must bear at least half of the risk of the loans.

The scheme did not prohibit the restructuring of loans between institutions and SMEs. This took into account the fact that many SMEs were unable to repay loans to lending institutions when the scheme was launched.

The Legislative Council's Finance Committee also noted that SMEs were particularly hard hit at the time, as many lending institutions had tightened their lending policy.

If the scheme did not allow for loan restructuring, lending institutions would simply recall the loans, and a lot of SMEs would have been forced to wind up their businesses as a result. 

As of this writing, the scheme's default rate is about 7.5%. This means that more than 92% of the loans guaranteed under the scheme are performing or are fully paid.

This demonstrates that the scheme is an effective and timely means of relieving SMEs' financial hardship during a severe liquidity crunch.

The Audit Commission completed a review of the scheme in October 2002, and came up with  recommendations for the Government to consider when launching similar schemes in future. 

We noted the Audit Commission's recommendations and will take them into account in designing and running similar loan guarantee schemes in future.

A case in point is the new "SME Loan Guarantee Scheme" which will be launched later this month to replace the existing SME Business Installation & Equipment Loan Guarantee Scheme.

To avoid abuse of the scheme, the legal documents to be signed between the Government and the participating lending institutions will expressly state that the target beneficiaries are SMEs which are creditworthy, have a good track record, and are able to demonstrate business prospects.

Also, the legal documents will prohibit lending institutions from making use of the scheme to help SMEs conduct loan restructuring. These safeguard measures are in line with the Audit Commission's recommendations, and the LegCo Finance Committee has endorsed them.

The Government's objectives in launching the loan-guarantee schemes are to help SMEs resolve their financing problems by helping them to develop sustainable relationships with lending institutions, with Government providing guarantees to initially cover part of the loan risks.

In doing so, we aim to strike the balance between achieving the schemes' objectives and putting in place the safeguards to avoid abuse.

We will continue to keep a close watch over the operation of such schemes to ensure that public money is put to effective use. 

The above is an extract from Eugene Fung's response to a South China Morning Post article on March 25.