Q & As for PLIs

Guarantee Application

1. How does the Special Loan Guarantee Scheme (SpGS) help small and medium enterprises (SMEs)?

   The Special Loan Guarantee Scheme (SpGS) aims to help enterprises secure loans from the participating lending institutions (PLIs) for meeting general business needs to tide over the liquidity problem during the global financial crisis with the Government acting as the guarantor. The SpGS provides a guarantee of up to 80% of the approved loan. The loans guaranteed under the SpGS can be in the form of either a term loan or revolving credit line (e.g. overdraft facility, revolving letter of credit in support of trade finance, etc). The maximum loan amount for each enterprise is $12 million. Within this limit, an enterprise may obtain a revolving credit line of up to $6 million.

   The application period of the SpGS has closed on 31 December 2010. Before the closure of application period, enterprises⁽¹⁾ meeting the following criteria were eligible for the SpGS :

   1. registered under the Business Registration Ordinance (Chapter 310) (except for listed companies, lending institutions and their associates), and with substantive business operation⁽²⁾ in Hong Kong;
   2. the enterprise must have been in operation for at least one year on the date of implementation of the SpGS (i.e. 15 December 2008); and
   3. the enterprise must have no outstanding default in any authorised institution as defined in the Banking Ordinance (Chapter 155).

   Personal guarantee(s) from the owner(s) of enterprise is/are required. If the enterprise is a limited company, personal guarantee(s) is/are required from shareholder(s) (whether an individual or a firm) together holding more than 50% of the equity interest of the enterprise.

   The loans should be used for meeting general business uses of enterprises. The loans cannot be used in whole or in part, for paying, repaying, restructuring or repackaging any loans, credit facilities or payment obligations.

   The maximum guarantee period for each loan is 60 months after the start date⁽³⁾, or up to December 2015, whichever is earlier.

   In respect of a term loan, the PLIs may grant a grace period in the first six months, during which the enterprise may pay the interest only. Thereafter, the loan should be repaid to the PLI by installments over a maximum of 54 months or up to 31 December 2015, whichever is earlier. The period between each repayment of principal should not exceed three months.

   In respect of a revolving credit line, the repayment should be made to the PLI over a maximum of 60 months or up to 31 December 2015, whichever is earlier. There will not be any fixed repayment period for revolving loans, but the PLIs are encouraged to term-out the loans at a suitable juncture to ensure an orderly repayment of the outstanding loan before expiry of the guarantee period.

   Note

   (1) Enterprises

   "Enterprise" refers to a legal entity who is engaged in any form of business for the purpose of gain. Non-profit-making or non-profit-distributing organisations are not eligible.

   (2) Substantive business operation

   To be eligible for the SpGS, an enterprise should have substantive business operation in Hong Kong. A business holding a shell business registration or having most of its main business operation outside Hong Kong will not be regarded as having substantive local business operation.

   (3) For term loans, it means the date on which any funds are first withdrawn against the approved loan. For revolving loans, it means the date on which the funds are made available for use by the Borrower.

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2. What types of documents a PLI should obtain from a Borrower for credit assessment? If a Borrower is unwilling to provide the required documents, will it affect the PLIs' right in making a default claim?

   The Deeds for the SpGS (i.e. the original Deed for the SpGS, First Supplemental Deed and Second Supplemental Deed) have clearly spelt out the PLI's obligations including the need to obtain audited accounts / financial statements to facilitate credit assessment. The PLIs should exercise due diligence and care in considering the types of documents, in addition to those specified in the Deeds, that are required from the Borrower for the purpose of assessing the creditworthiness of the Borrower before granting a facility.

   It is the TID's normal practice to, after a default claim is lodged, request a PLI to provide the relevant documents obtained from the Borrower during the loan application stage.  If the PLI considers that, despite the absence of certain documents, there are still sufficient grounds to support the granting of the facility, the PLI should, during the default claim stage, provide justifications to explain the rationale behind its decision.  The TID will consider them on a case-by-case basis. 

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3. My bank adopts a credit scoring system in considering loans of smaller amount. Under the credit scoring system, we would not consider information found in the financial statements. Is this acceptable under the SpGS?

   The TID would rely on the professional judgement of the PLIs in determining the factors to be considered in assessing the creditworthiness, repayment ability and business prospects of the Borrower before granting the loan.  In practice, during the default claim stage, PLI would need to demonstrate to the satisfaction of the TID that it has exercised professional judgement and due diligence in the loan approval process.  One of the major factors that the TID would consider is whether a particular practice in handling loans guaranteed under the SpGS is consistent with the prevailing practice of the PLI (i.e. applying across-the-board to both loans guaranteed and not guaranteed under the SpGS).  The PLI should ensure that the whole deliberation process, including the factors considered, the deliberations and the loan approval process should be well-documented in their credit assessment report or other relevant documents.

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4. Is it a must for the PLIs to obtain the financial statements from the Borrowers in support of their SpGS applications?

   Yes. As stipulated in the Deeds for the SpGS, all Borrowers established for more than 18 months are required to submit audited accounts or financial statements to the PLIs. However, flexibility is provided in the Deeds in respect of the requirement on submission of financial statements. Instead of the financial statements for the latest financial year, the PLI may permit the Borrower to submit the latest available financial statements (which could be of the previous financial year), provided it is consistent with the prevailing practice of the PLI in respect of loans granted outside the SpGS (i.e. loans where the PLI will have to shoulder 100% of the default risk), and the practice is consistent with the prudent credit risk management principles as specified by HKMA from time to time.

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5. Can a PLI grant a facility which is denominated in foreign currency?

   The Deeds for the SpGS have stipulated that a facility shall be denominated in Hong Kong dollars. While some PLIs may grant a facility in foreign currencies (e.g. trade finance in US dollars), the loan amount should be stated in (or converted into) Hong Kong dollars in the Guarantee under the SpGS.

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6. How to complete the information on personal guarantee in Part B of the Application Form? What are the required supporting documents?

   Depending on the type of business of the Borrower, the guarantor(s) should either be (i) the sole proprietor; (ii) partners; (iii) shareholder(s) who together hold(s) more than 50% equity interest; or (iv) authorised person(s) in the case of limited company providing a corporate guarantee.

   Supporting documents include the following:

   • a copy of the valid Business Registration Certificate of the Borrower;

    

   • a copy of the Certificate of Incorporation of the Borrower showing the date of its first incorporation (and all copies showing the names of the Borrower in case the name of the Borrower has been changed); and

    

   • any one of the following as appropriate with reference to the type of business:
     • Form 1(a) or Form 1(c) of the Business Registration Office, or
     • A company search report ; or
     • Annual return of the Companies Registry (Form AR1).

   Additional supporting documents will be required if the above supporting documents cannot fully illustrate the shareholding structure of the Borrower concerned, irrespective of whether the shareholder(s) is/are the Guarantors.

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7. If there is an additional Guarantor or other collaterals pledged to the Facility requested by the PLI, how to fill in such information on the Application Form?

   An additional Guarantor may be a natural person or company other than those mentioned in Question 5 above. The PLI should provide such information in Part C. 13 of the Application Form instead of Part B. The name of the Guarantor as well as his Hong Kong Identify Card number (for natural person)/its Business Registration Certificate number (for sole proprietor and partnership)/its Certificate of Incorporation number (for limited company) should be clearly stated.

   For additional collaterals such as property, detailed information should also be provided in Part C. 13 of the Application Form.

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8. If the Borrower changed its type of business immediately before the implementation of the SpGS, could it still be eligible for the scheme?

   To be eligible for the SpGS, enterprises must be registered and with substantive business operation in Hong Kong and have at least one year of operation as at 15 December 2008. The duration of the operation would count from the date of the establishment of the entity bearing the same Business Registration number.

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9. Are partners of a partnership with unlimited liability required to give a joint guarantee in support of its SpGS application?

   As stipulated in the Deeds for the SpGS, person(s) (which include an individual, sole proprietorship, firm, partnership, company, corporation and an unincorporated body of persons) who owns more than 50% equity interest of the enterprise shall give a joint and several guarantee in favour of the PLI for the full repayment of the indebtedness of the facility. As partners of a partnership with unlimited liability have already assumed full personal guarantee/liability for the debts of the partnership both jointly and severally, it is not obligatory for a PLI to request the partners to provide another joint guarantee in support of the SpGS application. However, the partners are required to complete the declaration in Part B of the Application Form.

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10. Is it acceptable for a subsidiary of an enterprise listed in Hong Kong or elsewhere to apply for the SpGS? If yes, is it acceptable for the listed company to provide a corporate guarantee?

    Yes, if the subsidiary itself is not a listed enterprise and is eligible to apply for guarantee under the SpGS. The listed company can provide a corporate guarantee in support of the application.

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11. If a company, which is held by Trust, applies for guarantee under the SpGS, who should be the Guarantor(s)?

    In deciding the right person for signing as the Guarantor(s), the PLI should ascertain from the Trust Deed or Declaration of Trust as to whether the beneficiary(ies) has/have the right to provide personal guarantee in support of the SpGS application. Alternatively, the Trustee may provide a corporate guarantee as authorised by the Trust Deed.

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12. What type of documents should a PLI provide to TID if a Trust is involved as a direct or indirect shareholder of the Borrower?

    The PLI should provide information on the beneficiary(ies) of the Trust involved, such as the Trust Deed or Declaration of Trust. If such information could not be provided, the PLI may provide a confirmation from the Borrower's auditor or company secretary on the particulars of the Trust beneficiary(ies), together with a written explanation as to why the Trust Deed or Declaration of Trust could not be provided. The TID will consider such applications on a case-by-case basis.

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13. Is it acceptable for a revolving loan to cover more than one type of facilities, e.g. both overdraft and trade finance related facilities?

    As required in the Deeds for the SpGS, the PLI shall establish and maintain a separate account as the designated account for the exclusive purpose of each facility so as to clearly show the movement of the loan money. If the facility covers more than one category of revolving loan which are grouped under the same designated account, one single SpGS application will suffice. The PLIs may decide whether they need to use sub-accounts under the designated account to cater for more than one category of revolving loan granted to the same Borrower under the same terms.

    Besides, a trade finance related facility may cover more than one type of facility, e.g. export and import bills, to meet the business needs of a Borrower. While a facility granted under the SpGS should not be used, in whole or in part, to pay, repay, restructure or repackage any loans, credit facilities or payment obligations, in the light of the common commercial practice in terms of trade finance, the Government may consider movement of credit between certain related loan types (e.g. import and export bills) within the same SpGS facility acceptable. The PLIs are advised to consult the TID about individual SpGS facilities in case of doubt.

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14. To be eligible for applying for guarantee under the SpGS, a Borrower shall not have outstanding default with any authorised institution. Is it necessary for a PLI to check the relevant information with all the banks and financial institutions with which the Borrower has business transactions in processing an SpGS application?

    It is a requirement under the Deeds for the SpGS that a Borrower shall not have any outstanding default with any authorised institution as defined in the Banking Ordinance (Chapter 155). We understand that in the course of doing business, an enterprise may have business transactions with many financial institutions, and it may not be possible for the subject PLI to check the relevant information with all those institutions. As such, in enforcing this requirement, the TID would rely on the professional judgement of the PLIs in checking the loan profile of the Borrower, including credit reference agencies such as Commercial Credit Reference Agency and, to the best knowledge of the PLI, all bank accounts of the Borrower in which the Borrower has maintained its existing loan or credit facilities.

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15. Is it acceptable under the SpGS for a Borrower to apply for a total loan amount exceeding $12 million, provided the total amount of government guarantee does not exceed its guarantee entitlement (i.e. with a guarantee ratio lower than 80%)?

    No. Under the SpGS, the maximum amount of loan that each enterprise may obtain is $12 million. It is not acceptable for the enterprise to obtain a larger loan amount even if the PLI is willing to accept a lower guarantee ratio.

    Borrowers wishing to apply for loans exceeding $12 million with a lower guarantee ratio may consider submitting guarantee applications under the SME Loan Guarantee Scheme (SGS) instead. The guarantee ratio under the SGS is 50%. It does not have any limit on the amount of loan to be granted by the PLIs, provided the maximum amount of guarantee for each Borrower does not exceed $6 million. However, only SMEs registered and having substantive business operation in Hong Kong are eligible for applying guarantee under the SGS.

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Notification of Result of Application

1. Can a Borrower draw down a loan upon the issue of a Notification of Result of Application for Special Loan Guarantee (i.e. AIP) by the TID?

   Yes. A PLI may release the loan to the Borrower once the AIP is issued. It is not necessary to wait for the formal Guarantee before the Borrower is allowed to draw down the loan.

   The PLIs are however reminded that drawdown of the loan (i.e. the starting date of the facility) should not be earlier than the date of the AIP.

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2. How to inform the TID of any changes after issue of the Notification of Result of Application for Special Loan Guarantee (i.e. AIP) but before the issue of formal Guarantee?

   The PLI should inform the TID of any changes by providing the correct information on TID652 and TID653.

   If the changes involve an upward amendment of the loan amount leading to higher guarantee amount or extension of the guarantee period prior to the drawdown of the facility, full justifications in writing should be provided.  The TID will consider the request on a case-by-case basis.  If accepted, the TID will issue to the PLI the formal Guarantee with the changes incorporated.  Please note such changes after drawdown of the loan will not be accepted.

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Issue of Guarantee

1. Is it necessary for a PLI to submit a facility letter in returning the Confirmation of Particulars of Special Loan Guarantee (TID652) and Acceptance of Conditions for the Issue of A Special Loan Guarantee (TID653)?

   Normally, it is not necessary for a PLI to provide a copy of the facility letter when returning TID652/TID653.  The PLI only needs to submit the facility letter upon request by the TID.

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2. In case there are any changes after issue of a Guarantee, is it necessary to inform the TID?

   The PLIs should provide the TID with accurate information at the time of returning the Confirmation of Particulars of Special Loan Guarantee (TID652). The TID will consider requests for changes after issue of Guarantee on a case-by-case basis. The PLIs will be required to provide supporting documents and the TID reserves the right to approve/reject such requests.

   For changes such as loan amount, risk sharing ratio, guarantee limit and guarantee period prior to the drawdown of the loan, if such requests are accepted by the TID, a new Guarantee for the loan will be issued to the PLIs.  The PLIs should however note that any request for upward amendment of the loan amount leading to higher guarantee amount or extension of the guarantee period will not normally be accepted.  Moreover, such changes after the drawdown of the loan will not be accepted.

   Regarding other changes such as designated bank account number and interest rate, the PLI should notify the TID in writing as soon as such changes are made.  The TID will only acknowledge receipt of the written notification but will not issue a new Guarantee.

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3. If a PLI wants to term-out an SpGS facility of revolving nature, is it necessary to obtain prior approval from the TID?

   PLIs may term-out a facility of revolving nature at a suitable juncture to ensure an orderly repayment of the outstanding loan before expiry of the guarantee period under the SpGS. There is no need for a PLI to seek prior approval for the term-out arrangement from the TID. However, the PLI should inform the TID in writing before such term-out arrangement takes effect.

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4. If the designated account number of an SpGS facility is changed after a revolving credit line is converted into a term loan, will that affect or void the Guarantee issued by the TID?

   No. A change of the designated account number arising from the said term-out arrangement would not void the Guarantee issued by the TID. The PLI should however inform the TID of the change as soon as practicable and keep proper record.

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5. Is it a must for the PLI to provide the Borrower with a grace period of six months for paying interest only in respect of an SpGS non-revolving loan?

   No. It is not obligatory for the PLI to grant such a grace period in respect of any non-revolving loan approved.

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1. What should be done to submit a default claim?

   If a Borrower fails to repay a loan guaranteed under the SpGS on a repayment date and the overdue remains outstanding 61 days after the relevant repayment date, the PLI may lodge a default claim with the TID.  The PLI is required to submit a completed Payment Request Form, together with the Questionnaire on Default Claim and other supporting documents required, to the TID within six months after the earliest relevant repayment date of the defaulted loan.

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2. What is the purpose of the amendment to Clause 4.1 of the original Deed for the SpGS as provided in the Second Supplemental Deed for the SpGS?

   The Second Supplemental Deed for the SpGS provides that if a Borrower fails to make any payment (whether principal or interest, and whether within or beyond the grace period granted) on the repayment date in accordance with the relevant Facility letter and that the unpaid amount remains outstanding 61 days after the relevant repayment date of the Facility, the PLI may submit its claim for payment.

   The purpose of the said provisions in the Second Supplemental Deed for the SpGS is to set out clearly that the PLIs are also allowed to submit default claims during the grace period. Under the SpGS, a grace period of six months may be allowed, during which the Borrower may repay the interest only. In other words, if a Borrower fails to repay the interest required during the grace period, a PLI may also submit a default claim in accordance with the timeframe stipulated in Clauses 4.1 and 4.3 of the original Deed, instead of having to wait until the principal is due.

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3. With the amendment to Clause 4.1 of the original Deed for the SpGS which sets out that the PLIs are allowed to submit default claims in the grace period during which the Borrower may repay the interest only, does it mean that the Government’s compensation payment would also cover the outstanding interest?

   No. As clearly stipulated in the Deeds for the SpGS, the Government will only pay up to an amount equal to the Indebtedness, multiplied by the risk sharing factor of the Government’s guarantee under the SpGS. Indebtedness refers to the amount of outstanding principal, excluding all outstanding interest, penalties, charges, etc.

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