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The Hong Kong Approach To Credit And Credit Culture In Banks: A Credit Manager's View

Mr. Desmond Wu is Head in Credit Risk Management Department - Industrial and Commercial Bank of China Asia Ltd.

The saying that " Hong Kong has no bankers" had once created repercussions in the bank credit circles. While this saying might have pushed the argument to an extreme and has been quipped to serve to catch public/political attention, the concept behind this statement does somehow point to a phenomenon common with the bank credit managers in Hong Kong - the general preference for tangible security.

"Hong Kong has no bankers?!"

In "Credit", cliches abound:

Yet, "Credit" has been so long a process of lending that it probably pre-existed banks. It is however delicately more than just lending. On a textbook approach, "Credit" is a process whereby the likelihood of default is identified, gauged and calculated. It will then be up to individual lenders to determine if the level of risk is acceptable or manageable on strength of its very own and particular tolerance level, capital base, portfolio mix, culture and regulatory environment. One possible conclusion of this process is of course to end! When it comes to banking business, this credit process is often termed the bankability of a borrower. Bankability in fact embodies both an objective analysis of the borrower's probability of default and a subjective evaluation of the lender's very own target business.

Credit is not risk-averse:

Obviously, Credit is business-linked. Essentially, the heavy executive and operating costs involved in doing credit assessment alone should unambiguously indicate that if not for maximization of profit (or minimization of loss), no banks will ever go into this exercise at all. Credit will be redundant absent a clear business/profit objective. No exception to Hong Kong, the requirement for credit management stems from an ultimate need to do business, i.e. to lend. The more sophisticated is the banking business, the more in depth analysis would be required of the credit managers. Thus, rather than saying that credit is risk-averse, it makes more sense if credit is steered to accept and take risks (for profit as reward). Credit should therefore not stop banks from lending, but rather to support and provide justification to lend.

Credit is a continuum:

If credit itself is profit-driven, then a credit-provider should carefully and practically position itself in the endless continuum between two credit extremes represented by the tightest credit assessment and the loosest. The ultimate test is what represents the most appropriate and profitable credit position. Credit policy statements provide useful general guidelines. Yet, when it comes to a practical front, the swift changes in the market situation and the competitive environment could easily make inflexible policies outdated or impractical. As always, perhaps, it is a dilemma between relying on objective policy statements and relying on subjective acumen and personal quality of credit managers. The former renders the latter redundant; the latter violates impersonal rules.

Credit is not a science:

In commercial lending, credit managers refer to (amongst other things) financial statements; in consumer lending, borrowers’ income and liability information; in project finance, forecasts and projections.... Credit is not scientific because it involves the use of historical data to predict the future. Inevitably, this prediction process encompasses various degrees of emotional judgements. Experienced credit managers will however never forget that science does not always mean accuracy. A more scientific credit process may not necessarily lead to a more accurate lending decision. HKMA's supervisory approach emphasizes understanding of the borrowers. Perhaps a more sensible and practical approach would remain the old truth - know yourself and know the counterpart.

"Hong Kong Has No Bankers" Revisited:

It is mentioned in the forepart the saying that "Hong Kong has no bankers". This remark could perhaps be qualified in light of the foregoing credit management environments in Hong Kong. The statement was first referred to in addressing the difficulties Small-and-Medium Enterprises (SMEs) were facing in getting credit facilities from banks. These SMEs are characterized by a lack of strong capital/asset base, sometimes a lack of updated financial information or track records, and short in their abilities to provide tangible security to banks. Nonetheless, they offer a whole-hearted involvement of the principals in the business management and a concept which promises a chance to succeed. Then to the mind of experienced credit managers, the big question never answered is that "if it fails".

Credit Culture For All:

Constantly changing, credit is a business, a culture and a risk/reward balance that perhaps should permeate into a wider walk of business life. While, banks in Hong Kong should develop a credit culture towards non-reliance on tangible security, enterprises should also cultivate its own sense of borrower-side credit culture by way of bettering financial management, risk-based business analysis and reserving an ability to withstand adversities. Credit culture is not just for financial institutions (as lenders), but also for entrepreneurs (as borrowers).

Created on 13-Mar, 2011 by HKCCMA.

Last Edited on 09-Apr, 2011 by HKCCMA.