Establishment of agency to significantly improve banking industry's credit risk management and reinforce borrower discipline

If you run a small- and medium-sized enterprise (SME), applying for a loan may become easier in 2002. According to Edmund Lau, head of the Banking Development Division of the Hong Kong Monetary Authority (HKMA), the proposal to establish a Commercial Credit Reference Agency (CCRA) in Hong Kong has garnered widespread support following the completion of a consultation process in mid-September.

Speaking at the Chamber's Nov. 30 roundtable luncheon entitled, "The Impact of the Commercial Credit Reference Agency on SMEs," Mr Lau said the CCRA would create a win-win situation for lenders and borrowers.

The setting up of a central database with credit information on borrowers is expected to "bring significant benefits to Hong Kong in terms of improving the banking industry's credit risk management and reinforcing borrower discipline, thereby enhancing the safety and soundness of the banking system," he said.

Commercial customers are also likely to benefit from higher transparency resulting in more competitive loan pricing.

The idea of a CCRA was prompted by Hong Kong companies' Ð particularly SMEs Ð call for changes to bank lending policies, which were seen by many to have contributed to a worsening of the credit squeeze problem brought on by the Asian financial crisis shortly after the handover.

By encouraging lending institutions to pool their information, the HKMA aims to overcome the issues of data confidentiality and competitive concerns, among others, which were judged to have accounted for this "market failure." This will hopefully enable banks to adjust their existing practice of relying on collateral and to overcome their reluctance in lending to SMEs, Mr Lau said.

For the CCRA to work, the HKMA has proposed that lending institutions' submissions of relevant information be made mandatory by law. This is a contentious issue which will be subject to further deliberations by a working group to be set up with representatives from affected industries.

Members of this group will also be charged with considering such matters as identifying an appropriate operator or operators, determining the extent of participation by those wishing to access and/or submit credit information, and better defining the meaning of an SME.

By improving the availability and quality of credit information, lending institutions should be more comfortable in lending to businesses, particularly SMEs where transparency is most lacking, Mr Lau said.