HKMA Says Banks Are Taking Risks On Home Loans

by Mary Swire, Tax-News.com, Hong Kong

01 May 2002

In its Annual Report issued yesterday, the Hong Kong Monetary Authority says it is concerned by increases in risk as a result of aggressive competition between banks eager to lend funds to home owners. Some banks were offering home loans at 2.6% below prime lending rates - or just 2.525% - the Authority said. The Authority also said it was watching the credit card business, which had become an arena of "strong competition" and rising bankruptcy-related bad loans.

Taxi licences, which cost more than HK$2.5m, are another area of concern, with banks offering loans with minimal or no deposits. The Authority sets a cap on the amount that can be lent for a taxi licence, currently $2.25m, but the banks get around this by offering 'cash back' schemes in which borrowers are lent the money to put down a deposit.

In his statement to the Annual Report and overview of the year 2001, Mr Joseph Yam, the Chief Executive of the HKMA, observes that, despite a very difficult year in 2001, Hong Kong's economic fundamentals remain strong, and its inherent qualities as a free and open city are as vital as ever. "Our financial and banking systems have continued to be robust, despite prolonged economic problems and the dramatic fall in asset prices," Mr Yam notes.

Mr Yam draws particular attention in the Report to progress made in developing financial infrastructure, and particularly to the first full year of operation of the HKMA's new US dollar clearing system, which saw a steady increase in business - much of it from outside Hong Kong.

Mr Yam notes that the banking sector maintained high levels of liquidity and capital strength during 2001, saw continued improvement in overall asset quality and recorded only a moderate decline in profitability. "Clearly, Hong Kong's banking industry remains safe and resilient," Mr Yam observes.

Referring to the debate on the peg in 2001, Mr Yam notes that the Linked Exchange Rate System provides a predictable and conducive business environment for an economy which imports practically everything that it consumes, processes or re-exports. "For a financial centre with heavy international capital flows but no capital controls, linking our currency to a strong international currency provides stability and strength," Mr Yam remarks. "Our Exchange Fund, which, against expectations, showed a modest investment profit in 2001, provides ample foreign exchange backing to support the Link," he adds.

The total stock of outstanding bank loans advanced for use in Hong Kong was $1.88 trillion at the end of the March quarter - 3.4% down on the same quarter last year. Loans to financial concerns were down 16.6% over the same period, other business financing was down 13.3%, wholesale and retail trade lending down 12.6%, and property development lending down 5%. In contrast, total home lending was up 7.3% and transport lending, including taxis, was up 2.7%.

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