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Business booming for HK's 'shadow banks'

This article is more than 12 months old

HONG KONG When Mr Horan Fu decided to buy a 500-sq-foot apartment for HK$7.4 million (S$1.3 million) last year, the biggest draw was the developer's offer of 85 per cent financing with an option to defer interest payments for the first three years.

"The interest rate could be a lot higher after three years, but there is also a chance that the interest would still be cheap because finance companies are competing fiercely," said Mr Fu, who works in Hong Kong's financial services industry.

With traditional financing drying up in Hong Kong at a time when property prices are at a record high, home buyers like Mr Fu are looking to non-bank lenders, many of them the financing arms of developers, to get in on the boom.

Under Hong Kong law, these "shadow banks" can loan legally as long as interest rates do not exceed 60 per cent per annum, according to industry officials and an official document seen by Reuters.

The system is a life-saver for those who have found it harder to secure loans, particularly mortgages, due to curbs imposed by the central bank to dampen home prices.

But it also puts the broader system at risk if property prices turn around or borrowers start to default, because many of these lenders have themselves raised financing by borrowing from big banks or selling bonds.

Because they are not banks - they do not take deposits - shadow lenders in Hong Kong are monitored by the police, and not the financial regulators.

Industry officials say share of shadow banking is growing fast, up at least 30 per cent to 40 per cent a year over the last couple of years.

That is no surprise given that mainstream lenders such as HSBC and Standard Chartered have capped mortgages at just 51 per cent at the end of last year, according to Standard & Poor's.

While non-bank financing companies play a major role in mortgage lending in many developed economies, regulators have been tightening their scrutiny of these lenders, especially after the sub-prime mortgage crisis in the United States.

The Hong Kong Monetary Authority told Reuters it had given guidance to banks to ensure they boost their "credit risk management" when it comes to lending to property developers.

Interest rates from shadow lenders vary widely, but they typically start at around 5 per cent and go up to 20 per cent or higher, versus 2 per cent to 3 per cent at regular banks, which also lend for longer terms of 25 to 30 years, industry sources said.

The Hong Kong police, the de facto regulator, said it did not have any data on buyer complaints against non-bank financing companies but added that they maintain a "close liaison" with the financial industry.

"Enforcement action will be taken by the police if there is evidence implicating any money lender engaged in illegal practices," they said in a statement.


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