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Tuesday, May 09, 2017, 22:06
Easy credit adds more debt stress
By Shadow Li
Tuesday, May 09, 2017, 22:06 By Shadow Li


Published Time: April 24, 2017, 11:28


Unsecured personal loans make it easier for poor families to gain short-term debt relief. Licensed moneylenders lend without collateral. Shadow Li follows the money trail and finds disturbing impacts on society of easy credit.



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The Legislative Council Secretariat’s Research Office briefing paper of November 2016 highlights the 85-percent increase in household debt of the average family, from HK$349,100 in 2005, to HK$646,100 in 2015. It cites data from the Hong Kong Monetary Authority (HKMA) and the Census & Statistical Department (C&SD).

Household debt up 85% since 2005. Licensed moneylenders up 250% since 2007

The report indicated that personal loans were surging ahead of loans for mortgages or credit card advances. Personal loans averaged HK$44,700 in 2005, constituting 12.8 percent of total household debt. In a decade, that has tripled to HK$144,800 — accounting for 22.4 percent of household debt in 2015.


The HKMA data shows the average household debt against GDP ratio increased from 54 percent to 67 percent between 2005 and 2015. Household debt growth is outpacing household income advances, which is unsustainable.


Off-radar debts

More alarming is the fact that these figures omit the scale of the unsecured loans offered by the city’s more than 1,800 money lenders — who do not ask for collateral. Families least able to cope, form the majority of personal loan applicants. It is a lucrative business: the number of licensed money lenders has zoomed 250 percent from 741 in 2007 to 1,860 by February 2017.

These non-bank financiers are regulated nominally by the Money Lenders Ordinance (MLO). For an application fee of HK$10,000, money lenders can be licensed and registered at the Companies Registry. Then they are free to sign-up the desperate indebted who cannot service their existing loans, and have no collateral. There is no public reporting, or monitoring, of the loans made by money lenders.

During a LegCo debate, the Secretary for Financial Services and the Treasury, Ceajer Chan Ka-keung, said money lenders accounted for less than 1 percent of the total amount loaned by banks — not enough to rock the stability of the financial system — hence there was no need to bring money lenders under the HKMA’s supervision.

The underlying logic for these licensed money lenders being free of HKMA supervision, is that unlike the banking sector which holds and deploys public cash deposits, money lenders risk their own capital. In Hong Kong’s pro-business logic, that entitles them to a free market with minimal government interference.



Call for watchdog

More alarming is the fact that these figures omit the scale of the unsecured loans offered by the city’s more than 1,800 money lenders — who do not ask for collateral. Families least able to cope, form the majority of personal loan applicants. It is a lucrative business: the number of licensed money lenders has zoomed 250 percent from 741 in 2007 to 1,860 by February 2017.

These non-bank financiers are regulated nominally by the Money Lenders Ordinance (MLO). For an application fee of HK$10,000, money lenders can be licensed and registered at the Companies Registry. Then they are free to sign-up the desperate indebted who cannot service their existing loans, and have no collateral. There is no public reporting, or monitoring, of the loans made by money lenders.

During a LegCo debate, the Secretary for Financial Services and the Treasury, Ceajer Chan Ka-keung, said money lenders accounted for less than 1 percent of the total amount loaned by banks — not enough to rock the stability of the financial system — hence there was no need to bring money lenders under the HKMA’s supervision.

The underlying logic for these licensed money lenders being free of HKMA supervision, is that unlike the banking sector which holds and deploys public cash deposits, money lenders risk their own capital. In Hong Kong’s pro-business logic, that entitles them to a free market with minimal government interference.


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Educating youth

Gilly Wong Fung-han, chief executive of the Consumer Council, believes the primary task for society is to raise public awareness through education. Social worker Yung agreed that it was vital to cultivate healthy spending habits, and to resist the lure of easy-credit advertisements, such as those on primetime TV.

Yung felt these adverts, where money lenders often make exaggerated claims, should be subject to tighter regulation. Professor Yip concurred, adding that we should not underestimate the effect of public education. Spending money responsibly needs to be taught, especially to the young.

Li Kwong-yan, general manager of United Asia Finance Limited (UA), the city’s leading money lending company, argued that advertising was the only way money lenders can reach prospective clients. The growth of unsecured personal loans is due to the outreach programs promoting the personal loans service.


Banks join personal loans market

UA innovated the formula of consolidating multiple credit card debt into one lump sum loan at lower interest rate, over a manageable tenure, for individuals who had maxed out on their credit card advances. That was its key to dominating Hong Kong’s non-bank personal loans sector.

The salaries of the low-income group are not enough to provide them a life with dignity

Yip Siu-fai, professor at Department of Social Work & Social Administration, University of Hong Kong

UA went from two branches to 49 in Hong Kong, and is now expanding into the personal loan services market on the Chinese mainland. In Hong Kong, UA registered a 53 percent growth of gross loan, from HK$4.6 billion in 2009 to HK$7.08 billion in 2014. The amount dropped to HK$6.6 billion in 2015 according to the company’s annual report.

Li figures that banks, since their growth spurt in personal loans services in 2005, have already taken more than half the market. In the early 1970s and 1980s, a few money lenders offering unsecured loans emerged. The game changed once the city’s major banks, including the HSBC, began offering similar services.

“Banks saw the potential of the personal loans market after the non-bank financial institutions seemed to make profits. Banks had reached saturation in their traditional industrial and business loans sectors, as Hong Kong’s economy peaked,” observed Li.




Personal loans less risky

Moneylenders account for less than 1% of the amount loaned by banks. There is no need to bring moneylenders under HKMA supervision

Ceajer Chan Ka-keung, secretary for financial services and the treasury

Business loans are more vulnerable to economic downturns than personal loans, hence the steady growth of personal loans since the financial crisis in 1997. Personal loans to the working class — the majority of clients — is less risky, notes Li, as Hong Kong has a full employment rate. Salaried borrowers earn a steady monthly income, which can be programed to service a lower interest rate over a longer tenure.

Li observed that the bulk of personal loans were to pay off credit card debts. The interest charged on credit cards is much higher than on personal loans. He noted a conflict of interest for banks promoting credit cards — and personal loans to clear the credit card debt!

Li feels that the Hong Kong money lending market is mature and stable. The Licensed Money Lenders’ Association, formed in 1999, has more than 40 members, covering about 70 percent of the personal loans by money lenders.

That the number of individual bankruptcy cases has remained constant since 2011 — at around 10,000 according to the Official Receiver’s Office — indicates that the situation has not worsened, says Li, on concerns about the negative impact of easy credit on the poorest segments of society.


Reining-in agents

Agents connecting the lender and the recipient are usually real estate salesmen or finance institution staff who can access data on those in need of loans. They are paid a commission by the money lenders but are prohibited from charging the recipients.



The MLO is a toothless tiger. We need a finance and debt consultation watchdog ­­­— like the Consumer Council

Pinky Yung Lai-ping,Caritas Hong Kong

Previously, middlemen with dubious credentials tricked vulnerable people to borrow money. Minimal paperwork and supporting documents were required. They demanded a hefty “administration fee”. “In an extreme case, a borrower of HK$1 million would only net a fifth of that sum,” said Gilly Wong.

In 2015, the consumer rights watchdog received 165 complaints on personal loans, of which 51 were against the financial intermediaries. Among these, 75 percent involved dubious sales practices.

The government has introduced additional licensing requirements for money lenders since Dec 1, 2016. Money lenders are now required to register their appointed intermediaries with the Company Registry, which is also in charge of  the registration of money lenders, so that the public can verify the agents who approach them.

Li feels the new arrangement puts the onus on money lenders. Money lenders’ agents should also be bound by government regulations. Li suggests that a money lender’s representative ought to have at least 10 years’ experience. He is also in favor of imposing a minimum capital requirement for the license.

Summary

•   Household debt rose sharply in the past decade, reaching 85% of average family income in 2015

•   Personal loan debt rose to almost 50% of average household income in 2015

•   Personal loans represent the fastest growing category within household debt, amid the boom in numbers of licensed moneylenders and unsecured loans

•   Expenditure on food accounted for 46% of income for families living under subsidized public housing in 2015

•   Authorized institution loans are publicly monitored. Unsecured loans by the licensed moneylenders are off the public radar

•   The socially disruptive effects of debt stress on family relationships – including potential breakdowns, is a high human cost for society. It needs to be addressed

Contact the writer at stushadow@chinadailyhk.com





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