The HSBC Bank, as one of loan issuer, there is about customization and how value propositions HSBC delivers to specific business loan requirements for example and the default rate of SME owners that can be well managed by the banks payment services division of HSBC in their SME banking system process. Then, HSBC bank uses computer based scoring system to approve new card issues and sophisticated software allowing it to track and chase after delayed payments. As HSBC has six authorized collecting agencies and the staff of these outsourced companies has been empowered to persuade the defaulters to make payments due to the bank. Such payment activities of business agencies are strictly monitored by the bank and any complaints of harassments to customers will be promptly investigated by the HSBC authorities as the HSBC has tight rules on provisioning of loans which can be higher than SCB.
SCB
Standard Chartered Bank has revised the lending criteria only to exclude any segments that have had poor repayment history. The decision is in line with the past performance of the said segments and expecting that they may perform worse in line with the increase in inflation. The bank has outsourced collections to such SME business and monitored by SCB bank authorities and that less than 2 percent of SCB SME borrowers can be within the stage of defaulting as the bank takes measures on proactive basis to recover the dues (cited in, Bandula Sirimanna http://sundaytimes.lk/071223/FinancialTimes/ft339.html)
The banks are required to maintain capital to risk weighted assets ratios of such percentage as required by the financial system. SCB and HSBC do follow International Accounting Standards, although financial authorities in HK are active in supervising and monitoring regulations on financial institutions. In a global financial market, finance strength regulators that operate SCB and HSBC banks should think about the compatibility of the regulatory setting within standards. Through a deep understanding of SCB and HSBC SME banking business and within banking supervisory framework, financial regulators will be able to develop sound banking system as better business strategy applied towards SMEs in HK without loosing reliable financial services.
Thus, lending to the SME sectors require that the bank establishes appropriate structures for servicing the customers and learns how to successfully finance such target group within capacity building to ensure that SCB and HSBC have the required skills and technology to service borrowers in efficient way. The banks generally need collateral from borrower as guarantee towards repayment of mortgage loans as an example. SCB and HSBC could take the lead in organizing financing fairs for SMEs in order to address some of the critical aspects involved like employing of relationship managers to reach out to prospective clients and provide services to understand each other better and facilitate services adapted within ample needs. SCB and HSBC as better financial institutions must then construct profitable and efficient credit and equity programs for HK SME sector. To compete effectively in SME financing sector, SCB and HSBC need to provide financial services that meet specialized needs of the company while coping with the high risks and costs associated. The emphasis should shift from product-based focus into customer-oriented focus for providing packages of financial services tailored to pricing needs and the potential of improving the SCB and HSBC relations of SMEs and increasing such profitability of providing financial services from within as the banking sector is different in some respects from the markets for other goods and services. A range of factors could create potential sources of market failure even if there is strong competition between banks.
Several effect on SCB and HSBC as long-term providers of finance – applied to SMEs
Ideally, bank management based lending decisions on a long-term view of the market requiring values to be determined by reference to short-term movements in loan spreads and interest rates of the SME business but, there would invariably bring short-term factors into lending decisions and that the banks behavior being influenced by financial considerations has been not supported by economic reality. For instance, some volatility injected into the balance-sheet would increase short-term pressures on lending decisions by SCB and HSBC. Changes in loan and capital spreads would have bearing on reported profit and yet the counterparty may still be debt worthy and the effect on the bank in terms of the SME payments due like, on a loan basis can be neutral. The effect will possibly be the banks being reluctance to provide long-term finance to SME sectors that may have track record of volatile credit default ratings. It would also seem high that the finance bias in favor of floating rates would have an adverse effect on the provision and use of fixed rate lending. This results from the fact that value would be measured no longer by reference to cash flow but to the comparative difference between the fixed interest rate implicit in payments and the variable market rate. This could potentially have bearing on fixed rate lending to small and medium-sized enterprises fixed rate mortgages and the fixed rate securities markets. The general effect could be to weaken the position of SCB and HSBC as the providers of better finance to SME industry, discourage lending to the business wherein payment abilities as well as credit ratings are volatile over precise economic cycle as SMEs does attract lower levels of finance at rates that reflected the greater perceived risk. In times of economic downturn, there would be pressure on the banks to hold greater proportion of assets in high quality bonds, given the stability that returns would bring to ideal financial performance.
Assessment of Findings – Comparison of HSBC to SCB in showing financial strength to SME’s
Furthermore, the following figures show findings in numbers below show how SCB and HSBC considers financial strength as major factor with such data on delay payment through such SME’s served by the two banks within certain number of days.
Example
Time line:
2007
HSBC
(Considering financial strength as major factor)
Sample:
46000 SMEs
% of SMEs
Loan aging days (i.e. days of loan repayment delay)
96.36
On time
3.64
Delay
1675
SMEs with delay payment, spread as below:-
37
0-15 days
19
16-30 days
23
31-45 days
16
46-60 days
5
> 60 days
SCB
(Considering financial strength along with other factor with equal weight)
Sample:
13000 SMEs
% of SMEs
Loan aging days (i.e. days of loan repayment delay)
95.47
On time
4.53
Delay
589
SMEs with delay payment, spread as below:-
34
0-15 days
22
16-30 days
20
31-45 days
13
46-60 days
11
> 60 days
The above data shows how HSBC and SCB consider financial strength as a major factor for SMEs in such loan days from within days of repayment delays made by the SMEs. For HSBC for instance, there has been a total of 46000 SMEs showing that only 3.64 percent have delayed their loan payments as of the year 2007 showing only a small percentage of delay as compared to those SMEs who paid on time comprising of 9.36 percentage of the total SMEs served by the HSBC The most delayed payment in days format have accumulated to 15 days with a total of 1675 SMEs and so on and that 16 SMEs made payments to HSBC from around 40 to 60 days and only 5 SMEs made payments in less than 5 days in duration. Thus, in comparison to SCB serving to a total of 13000 much lesser to HSBC has gained consideration in financial strength within equal weight as more SMEs paid on time loans to SCB comprising of 95.47 percent and only 4.53 percent have assumed delay of payment. The most delay is of 15 days payment time as 34 SMEs were involved and the least, less than 60 days of 11 SMEs then 22 paid SCB 16 to 30 days and so on.
The findings entail that for SCB and HSBC, effective financial strength shows a positive notion to the banking strategy success for SME banking services both banks offered and that the relationship of the bank as a lender to the SMEs as borrowers have shown balance outcomes since, most SMEs as indicated in data shows on time payment attitude for the loans they have made within the bank. This ascertain that financial strength adheres to a powerful banking operation activities of SCB and HSBC and such strategy applied within HK SMEs maybe of worth value.
Geographic location that SMEs mainly deal with, identified by sales contribution from location (within SCB)
SMEs
On time
Delay
% of Delay
North America
4367
172
3.94%
Latin America
361
42
11.63%
European
1231
33
2.68%
UK
568
18
3.17%
Eastern Europe
56
6
10.71%
Middle East
38
2
5.26%
Australia
187
6
3.21%
Japan
1553
34
2.19%
Korea
292
34
11.64%
Taiwan
1389
157
11.30%
China
2369
85
3.59%
12411
589
The information above explains how such geographic location shows ample strength within SMEs in certain countries as identified by sales contribution and location, this shows percentage rates of delayed payments as the most delay happens in Korea of 11.64 percent followed by Latin America of 11.63 percent and comes next is Taiwan of 11.30 percent. Thus, most on time payments is within the North America region comprising of 4367 SMEs and the least is within the Middle East by having only 38 SMEs this can be due to more strict policies imposed by the countries within the banking sector and business industry respectively.
Management experience that SMEs mainly having
SMEs
On time
Delay
% of Delay
30yr
2589
22
0.85%
25yr
2438
30
1.23%
20yr
2367
106
4.48%
10-15yr
2689
164
6.10%
<10yr
2328
267
11.47%
12411
589
The above emphasizes management experiences in years that several SMEs have experienced in such ways having 30 years as the most time duration and less than 10 years time as the least of delayed percentage in such on time and delayed payments done by the SMEs. There shows that on time payments happens to be within 10 to 15 years with a total of 2689 SMEs comes next is the 30 years period of 2589 SMEs and so on while on the delay side it happens to be less than 10 years experience of 267 SMEs in delay followed by 164 SMEs and 106 SMEs having the least delayed of 22 SMEs with 30 years experience. The overall findings then, manifest a stable banking financial strength of SCB and HSBC and the fair finance standards valuation as duly imposed within banking operation services given to the SME business.
Group A:
HSBC
DBS
Group B:
Standard Chartered Bank
Bank of China
Hang Seng Bank
ICBC
Citibank
Group A: Location of Borrower for Assessment
Group B: Use only Financial Information
(Net income / Sales revenue)
on SMEs loan product
(Bad debt / Sales revenue)
on SMEs loan product
HSBC
6.38%
3.64%
DBS
5.78%
3.87%
Standard Chartered Bank
6.57%
4.53%
Bank of China
5.73%
4.27%
Hang Seng Bank
5.82%
4.42%
ICBC
5.42%
4.02%
Citibank
5.96%
4.87%
Group C:
HSBC
DBS
Group D:
Standard Chartered Bank
Bank of China
Hang Seng Bank
ICBC
Citibank
Group C: Management experience for Assessment
Group D: Use only Financial Information
(Net income / Sales revenue)
on SMEs loan product
(Bad debt / Sales revenue)
on SMEs loan product
HSBC
6.38%
3.64%
DBS
5.78%
3.87%
Standard Chartered Bank
6.57%
4.53%
Bank of China
5.73%
4.27%
Hang Seng Bank
5.82%
4.42%
ICBC
5.42%
4.02%
Citibank
5.96%
4.87%
The above bar chart shows the difference pointing to HSBC over SCB in specific group denomination wherein HSBC a part of Group A by having comprehensive assessment linking towards geographic location comparison to SCB in Group B that have application of financial information assessment only and there is Group C that adheres to management experience in comparison to Group D with use of financial information for its assessment. The comparison of bad debt ratio and what accounts for such profitability or sales revenue pointing towards SME loan product of the two banks as the data shoes that only a slight difference occurred in percentage of about 0.19 percent as HSBC is of 6.38 percent lower than SCB of 6.57 percent thus, accounting for bad debt assumption of the banks wherein SCB is much of high risk at 4.53 percent as compared to HSBC of 3.64 percent. The information of such standardization process can be that SCB have higher delinquency rate as compared to HSBC when it comes to loans done by SME’s. Furthermore, SCB and HSBC have attempted to improve the measurement and management of financial risks by means of assigning risk ratings for certain business loans such as for SME business and it is true that riskier loans generally carry high interest rates and that such location of the business and certain management experience does integrate an effect as to why delinquency issues are present within the banking sector as there can be indication that SCB and HSBC have imposed price for experiencing too much risk as a lender to SME’s that may outcome into a delinquent borrower and by this, delinquency rates are rampant within the banks and since, SCB and HSBC can serve as a commercial or business banks to such business organizations, the graph below shows how delinquency rates strikes such as applied commercial real estate that may assume mortgage loans among SME business and it is clear that high delinquency rate is within business arena comprising of 12 percent ratio as compared to consumer usage of cards and residential estates ratio.
Source: Federal Reserve, adopted from: Calculated Risk: Finance and Economics (2008), Fed: Delinquency Rates Rose Sharply in Q1 (May 21, 2008)
Retrieved at: <http://calculatedrisk.blogspot.com/2008/05/fed-delinquency-rates-rose-sharply-in.html>
The above is shown because it can be of ideal purpose to research investigation wherein some financial standards are not in parallel to the banks financial statements such as those in audited report domain. Thus, banking delinquencies is rising quickly and reinforces the banks long-standing view that the surge in mortgage defaults rather than such reflection of poor underwriting standards in specific subprime process. Understanding that the main driver of the defaults is the decline in such service prices, the increase in negative equity positions and the inability of SME’s as borrowers who encounter financial stress to continue refinance several ways out of trouble in business. Although big enterprises borrowers are quite likely to encounter financial stress than SME’s and the share of negative-equity borrowers who will end up defaulting can be much higher in the business banking sector wherein there is better outlook for the trajectory of credit losses in the global market is not different in major stance. For HK SME’s, the investment in capital goods is determined by the expected returns from investment which must be high enough to cover all costs including the cost of borrowing. Conversely, when the economy is near good employment and the price level is rising, fiscal and monetary policies aimed at keeping rates constant could contribute to an increase in delinquency among unemployed owners of business loans and mortgage accounts. The mortgage delinquency rate is positively related to the interest rates. Therefore, SCB and HSBC money policy will be boosting SME economy by lowering the interest rate in order to encourage borrowing as well as contribute to the decline in delinquency rate associated with periods of business slump. As the lower interest rate reduces the costs associated with debt outstanding, thereby reducing risks involved in delinquencies. In contrast, when bank raises the interest rate in order to slow down an economy heading towards inflation, the associated extra costs does increase the risks of default payments on debt outstanding and awareness as created by SME business. There provides evidence that expanding loans to lower income and more risky borrowers under the affordable mortgage portfolios and lending policies do contribute to the rise in delinquency rate of SCB and HSBC as the effective management policies undertaken by debt issuers have allowed the banks to reduce the delinquencies generated by lower income and risky SME owners in particular. Indeed, by any given time, the variation in past due payments and the duration of delinquency of SME business accounts does have significant effect on such delinquency rate within the present financial time (cited in, Sissoko, Macki (2006), The Determinants of Delinquency Rate on Commercial Banks Mortgage and Credit Card Debts, Credit and Financial Management Review). The financial statements have been prepared in accordance with generally accepted accounting principles which require the measurement of financial position and results of operations without consideration of changes in the relative purchasing power over time due to inflation.
CONCLUSION AND RECOMMENDATIONS
In conclusion, the debt/credit assessment method of the two banks upon considering management experience as well as location of SME borrowers can help in reducing delinquency rate as compared to certain assessment method that only considers using financial information. The presence of delinquency rates then, incurs to certain percentage of accounts in the portfolio greater than days of past due as it can forecast future charges and subsequent losses. For instance, banks collection managers develop strategies such as campaign structures focused on reducing delinquency rates for SME banking as the financial services companies indicate that low delinquency does not necessarily guarantee low losses as it represent significant departure from conventional collection theory, a trend experienced by many lenders in recent years. Indeed, delinquency is not necessarily good indicator for losses as strategies and technologies can be implemented that allow independent collection treatments in early stage collections from those found in the later stage. The relationship between delinquency and finance standards of such information will continue to diminish as long as there can be effective repayment as well as collection strategies throughout the delinquency cycles. Then, SCB and HSBC need to ready banking operations for a possible banking turbulence by leveraging their ability to mitigate such loss without losing focus on too much delinquency rates and accounting of bank load through the adoption of a possible effective loss mitigation approach. Aside, it is important to fully understand banking processes, policies and technologies being used for banking activity to ensure these banks are maximizing the probability of success. For example, it is important to align collection recovery strategies by credit type as ideal for small businesses. The linking credit booms with banking crises, current mortgage delinquencies in the mortgage market appear indeed to be related to past credit growth and find that delinquency rates rose more sharply in areas that experienced larger increases in number and volume of originated loans (cited in, Dell’ Ariccia, Igan, and Laeven, 2008). The relationships then have to be linked upon decrease in the lending standards that can be measured by significant increase in loan to income ratios and decline in denial rates, not explained by improvement in the underlying economic fundamentals. There can be deterioration in the banks lending standards within certain finance factors as standards tended to decline more wherein credit boom was larger consistent with evidence on aggregate credit booms. Lower standards are being associated with fast rate of mortgage price appreciation, consistent with the notion that lenders were relying on the fact that borrowers in default could always liquidate the collateral and repay the loan and some changes in business structure mattered as lending standards declined where large absent institutions entered the market. The increasing recourse by banks to loan sales and asset securitization appears to have affected lender behavior, with lending standards experiencing greater declines in areas where lenders sold larger proportion of originated loans. In mortgage market most of these effects appear to be stronger and more significant than in the prime mortgage market, where loan denial decisions seem to be more closely related to economic fundamentals. The findings have to be consistent with the notion that credit growth episode within cycles of lending standard does create vulnerabilities in SCB and HSBC financial system. The experience demonstrates that even highly-developed financial markets are not immune to problems associated with credit booms. Truly, monetary tightening can reduce both the demand and supply of bank loans; its effectiveness is often limited by capital account openness. This is especially the case in small open economies and in countries with more advanced financial sectors, where banks have easy access to foreign credit, including from parent institutions. Applying policies in order to ensure that banks and SME head are equipped to deal with enhanced credit risk for certain categories of loans, limits on foreign exchange exposure and maturity mismatch regulation thus, reducing distortions and limit excessive borrowing and lending (cited in, Ho and Pennington-Cross, 2007). For appropriate recommendation as based on research findings, SCB and HSBC banking process in financial standards as measuring financial strength can be utilizing accurate details of payment schedules and dates to avoid payment delays of such mortgages and loans made by such SMEs mention and thus by having more banking securities needed for specific finance areas as applied for Hong Kong SMEs as the businesses may have high delinquency rate as it becomes apparent that SCB and HSBC in their banking strategy are among the vital aspects for SMEs in HK to succeed and meet the goal of having satisfied clients. From this discussion, several important points had been suggested. On the other side, in order for SCB and HSBC to stay competitive, price approach must be considered upon such determination of default rates that may vary amounts for loan interests as the banks provide finance charges but give SMEs greater payment chances and time upon having better banking standards and quality and have such quantity of a particular mortgage item as by this manner, SCB and HSBC are trying to keep basic banking rates ideal upon meeting the demands of customers regarding credit usage and avoid issues of delinquent borrowers. Truly, SCB and HSBC must be able to utilize payment models for SME’s in order to generate return of revenues being used and should have the capability of prioritizing banking operations at the maximum level of financial standards and strength.
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Website:
SCB Annual Report, Interim 2007, Leading the Way
http://www.standardchartered.com/about-us/en/index.html
HSBC Report, 2008 http://www.hsbc.com/1/2/newsroom/news/news-archive-2008/hsbc-holdings-plc-2008-interim-results-highlights
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