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Monday, October 31, 2016, 23:33

HK lenders fight it out for tax loan pie

By Lin Wenjie
HK lenders fight it out for tax loan pie
Hong Kong’s Central business district is home to a cluster of big name financial institutions. Local banks have ramped up efforts by offering low interest rates to grab customers seeking cheap loans during the tax season. But experts warn that such banks, usually with limited profit margins, are inching toward the brink due to piling capital costs and bad debt risks. (Parker Zheng / China Daily)

The annual tax season is here, with tens of thousands of Hong Kong’s taxpayers, particularly the lower and middle-income groups, probably scratching their heads.

Local banks, as in the past, have upped the stakes, dishing out all sorts of tax loan products, some with a string of incentives, to grab a slice of the pie and help workers ride out their financial stress, while loans seekers scramble to beat anticipated interest-rate hikes.

Conservative banks beg to differ, warn of high capital costs and bad debt risks

James Sheng Ping, a 29-year-old office worker, is seeking cheap loans offered by local lenders to fund tax payments so he can have some extra money left for Christmas and the coming Spring Festival.

“Getting a tax loan is faster and more affordable than personal loans although I need to pay it back in a short time. But, that’s not a big problem. I think it’s a good deal,” he says.

Taxpayers in Hong Kong could borrow up to 10 to 12 times their monthly salary through an array of tax loans, compared to personal loans that can go up to 18 to 21 times a borrower’s monthly salary. The usual repayment period for a tax loan is 12 to 24 months — much shorter than that of various types of personal loans which require repayment periods of up to 84 months.

Sheng took out a HK$60,000 tax loan last year with an annual interest rate of 1.5 percent to be paid back within a year. After settling his HK$4,000 tax bill, he still had HK$56,000 at his disposal.

“The bank doesn’t care where the money goes, so I used it for some investments last year. But, this year, I’m still hoping for a lower interest rate as the tax loan battle among banks has just begun.”

The tax season usually starts from October when various banks launch various tax loan products with competitive low interest rates for employees to pay taxes to the government every year in two installments between January and April.

With the US Federal Reserve set to put off interest-rate hikes to the end of this year, Hong Kong banks have stepped up efforts for a bigger slice of the tax loan market this year, offering extremely low interest rates.

Nanyang Commercial Bank fired the first salvo on Sept 20, offering tax loans with a minimum annualized percentage rate (APR) of 1.26 percent — the third-lowest rate so far.

Two weeks later, OCBC Wing Hang Bank launched its “Tax Money” plan, with regular customers enjoying a standardized APR at 1.25 percent — the second lowest for now. However, the bank’s new customers will only be offered an APR of 1.57 percent.

“I think it’s likely the loan rate will be cut again later. But, don’t worry as we will not do business without making any profit,” said Hilda Ng Kwok-yan, general manager of OCBC Wing Hang Credit. “As long as the risk management is done properly, such as selecting quality customers, we can still make a profit,” she said.

The lowest loan rate at present is offered by Chong Hing Bank, which charges clients who borrow HK$1 million at an APR of just 1.23 percent.

“This year’s tax loan battle year has become fiercer than ever. Initially, many banks have set their tax loan rates at a very low level, which is beyond my expectation. In the past, banks would normally charge a slightly higher rate in the early stages before trimming it. But, this time, they’re reluctant to wait,” said Ng.

“The market environment is really tough due to the staggering global economy and a poor investment environment. So, it’s very important for banks to fight it out for the tax loan pie.”

In her view, those seeking tax loans are “high-quality and high-end” customers, and they’re favored by banks because of their stable income and ability to repay, which may help the bank expand into other businesses. This is why most banks are vigorously involved in the battle although their profit margins for tax loans are very limited.

Ng believes that Hong Kong banks’ profitability will not be affected a great deal by a 0.25-0.5 percent rate increase in the US. Even if the investment sentiment remains weak, she estimates that the loan market will still go up by 10 percent this year.

However, not all banks have an appetite for the tax loan business.

Fubon Bank steered clear of the segment this year in order to protect its profits, saying its cheapest loan would carry an APR of 1.97 percent for customers borrowing between HK$800,000 and HK$1 million.

“We will not cut rates to win over customers. The advantage of our tax loan products is that they’re simple and easy to understand,” said Stanley Ku Cho-ming, head of consumer finance at the bank, indicating that some banks are offering low loan rates with additional provisions or cross-selling products, and it’s difficult for customers to meet the conditions attached.

“We provide a reasonable loan rate. This year’s rate will not be much different from last year’s,” he said.

“I’m surprised to find many banks cutting rates to grab customers. Considering the capital costs and bad debt risks, these banks, with limited profit margins, are pushing themselves to the brink.”
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