A comparative study between SCB and HSBC about its business strategy towards small and medium enterprise in HK

ABSTRACT
The Hong Kong banking sectors does have innovative opportunities for small and medium-sized enterprises upon extending the customer base within the global marketplace. However, SCB and HSBC will need to adopt such approach to financial planning and management which deploy an effective banking network by linking towards a better financial approach determining financial statement in its value and strength. This research represents better framework for analysis and crafting of financial patterns of SCB and HSBC in their business strategy pointing to the management as well as execution of finance factors into SME context. This research investigation can be that the banks involved can achieve better financial status and competence without experiencing much delinquency of such financial statements found in cash flows and balance sheets with HK banking competencies for managing business relations as well as engagements with other banking sectors (in, Venkatraman and Henderson 1998). The setting of standards by SCB and HSBC is an important factor upon determining such company financial strength mostly dealing to various SME businesses focusing the Hong Kong region.

INTRODUCTION

SCB and HSBC are two of the most known financial institutions soaring its business opportunities by serving clients with greatness and confidence and in order to assume spontaneity of financial services offered by these banks it is just imperative to create certain set ups pointing towards the financial standards in such picking up of financial strength within financial functions as for example, those present in small and medium sized enterprises. Thus, ideal to compare such financial standards of SCB and HSBC respectively. To realize certain applicable domains upon which effective standards for finance review should be looked at within the two banks. Aside, understanding of the SME process must also be considered to provide linking to such figurative outcomes of finance side, being aware of SCB and HSBC finance standpoints for the past interim years. Indeed, the importance of such standards are seen through effective assimilation of such financial statements serving as the valuable indicator wherein ample strength of SCB and HSBC is looked upon in its business strategy towards SMEs in Hong Kong, there can accounts for delinquency and such pricing relationships in such financial statement understanding. The comparative analysis of SCB and HSBC can be supported by such case study evaluation and is backed up with qualitative and quantitative approach for research study as the banking sector in HK is aware of determining strength over delinquency when talking to effective presentation of financial statements in such cash flows and balance sheets of the two banks that can be ideal for SME assimilation into the HK region.

RESEARCH BACKGROUND

Financial Institution such as the SCB and the HSBC incurs a useful potential to play major role in finance through SME companies in Hong Kong. With increased global competition, the finance function can be exploited to allow HSBC for instance, to gain financial advantage in the HK market stance as there can be delinquency of banking operations affecting the overall indication of the financial statement and its ways. There has to be comparative case study between SCB and HSBC as to how the two banks can positively achieve accuracy and appropriateness in the financial standards such as by looking through the financial strength they can offer to SME business. Thus, incorporating success of the financial services of SCB and HSBC can be their ideal business strategy to be executed for SME business in Hong Kong.

The methodology value by then, can be based on literature studies of SCB and HSBC through research analysis as supported by reviewed studies on small and mediumsized in HK with the objective of understanding the background of the banks financial strength and how it relates to pricing opportunities as the banks do strive to become more financial competitive centered (in, Eccles and Holt, 2001; Rugby Estates, 2000). The data required for case analysis have been collected SCB and HSBCs annual reports and statements have been referred for the collection of accurate data. The main objective of the research is to understand how the two banks developed good financial

strength over the years, avoiding delinquencies to the financial statements. Thus, analyzing history of the company, its strategy and goals, strategies as well as the process they used to bring the company to the position as of the present. Then, certain banking decisions should involve the volume and timing of orders and deliveries and the packing of items in consolidation (in, Eccles and Holt, 2001; Rugby Estates, 2000).

There are several constraints influencing the level of stock and the speed of material flow along the banking logistics chain. The level of stock and the speeds the material flow depend upon the nature of the supply and demand. The management of banking demand drives the level of capacity required (in, Barth et al., 2002; Calomiris and Powell, 2001). The study examines different banking approaches to determine whether a bank will be associated with good financial concepts and will focus on certain clients as Hong Kong has been Chinese-dominated society with different types of banks and this allows for cross-section of cases in order to test the reality and applicability of research over financial statements with specific relationships such as pricing within the banking service ways. In order to clarify objectives of whether there is an indication of delinquency of SCB and HSBC statements that can adhere if there impose a good borrower of the banks into customer awareness and such hypothesis are developed as below.

RESEARCH HYPOTHESES

Hypothesis One: Debt/credit assessment method of SCB and HSBC upon considering location of SME borrowers does reduce delinquency as compared to the assessment method that only considers financial information

Hypothesis Two: Debt/credit assessment method of SCB and HSBC upon considering management experience of SME does reduce delinquency as compared to the assessment method that only considers financial information

CONTRIBUTIONS TO RESEARCH AND PRACTICE

The research calls for precise execution of factual knowledge supporting financial strength over delinquency within SCB and HSBC as geared towards SMEs in HK. Hence, for practice the recognition of resources to research and its evidences will amiably be a part of the whole continuum basically, achieving details of banking finance statements through cash flows and balance sheets and the underlying issues within finance sectors of SCB and HSBC in order to fully adopt and execute in the hope of maintaining good banking business in Hong Kong.

RESEARCH APPROACH

The ideal research approach significant for research is by means of thorough applications of comprehensive financial analysis imposing standards and strength from within into useful research paradigm through case study assimilation as well as having factual evidence that can be directed to financial aspect of the banks as supported by reliable case studies presented through reliable journals and articles as based on the topic. The involvement of SCB and HSBC in such media releases of banking fact is a positive factor to value application of financial approaches found within case patterns and such financial context and principles.

THE REVIEW OF LITERATURE

SEVERAL FACTS CONCERNING SCB AND HSBC

Standard Chartered Bank (SCB)

SCB is known and trusted for having high standards of corporate responsibility as the bank is committed to building sustainable business through social inclusion, environmental protection and good governance, by combining the global capabilities with deep local knowledge, SCB develop innovative products and services to meet the diverse and ever-changing needs of individual, corporate and institutional customers in some of the world's most exciting and dynamic markets (in, Barth et al., 2002; Calomiris and Powell, 2001). There is about SCB in terms of their SME Banking which offers variety of products and services to help small and medium-sized enterprises manage the demands of growing business through providing global support in Standard Chartered, the bank knows that doing business in today's economic climate is challenging and situations as well as business needs can change overnight as the SCB can help SMEs in HK for such business expansion plans. The SME Banking team is dedicated to the people and the business thus, helping SME business reach ample potential by means of customize product packages, responsive services and access to expert advice incurring effective business operations (in, SCB report, 2007).

Hong Kong Shanghai Banking Corporation (HSBC)

HSBCs commitment to maintaining its financial strength is unwavering. HSBC remains both strongly capitalised and liquid and have maintained key credit ratings, generated good profitability in adverse market conditions and continued to focus investment on our

strategic priorities. The principal concerns in this environment have been risk management, strict cost control, supporting customers and continued investment to support long-term strategic ambitions in broad-based and resilient revenue streams continue to provide stable platform from which to achieve strong, longterm performance (in, HSBC Holdings Plc, 2008).

Brief Information on Financial Statements

Indeed, objective of financial statements is to provide information about the financial strength, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions and it should be understandable, relevant, reliable and comparable. Reported assets, liabilities and equity are directly related to an organization's financial position. Financial statements are intended to be understandable by readers who have "a reasonable knowledge of business and economic activities and accounting and who are willing to study the information diligently (in, Klh and Stella, 2003, 2008). Then, SCB and HSBC require financial statements to make important business decisions that affect its continued operations. Financial analysis is then performed on these statements to provide management with a more detailed understanding of the figures as these banks are external users can be outside the business but need financial information about the business for diverse number of reasons. They are financial institutions able to decide whether to grant

company with fresh working capital or extend debt securities to finance expansion and other significant expenditures (in, Klh and Stella, 2003, 2008).

Financial Strength Some concepts and ideas

Financial strength was used in describing certain extent to which an entity is constrained by its financial situation in pursuing its strategic goals or policies. An entity is financially strong when it is relatively unconstrained and weak when financial constraints are binding on policy choices. The financial strength of the banks is intimately linked to the successful management of the enterprise. Henceforth, enterprises with a large market capitalization have either been successful at generating earnings in the past and/or are expected to be profitable in the future. Furthermore, what appears to be confusion over micro and macro performance is responsible for a certain lack of general understanding about the importance of central bank financial strength. SCB and HSBC financial accounts do provide useful information on the cost of achieving policy outcomes. Indeed they provide information vital to any discussion as to whether the outputs are being attained at least cost (in, Klh and Stella, 2005, 2008). The bank deals in financial markets to achieve policy goals, not to maximize its revenues.

When the issue of financial strength does arise in those countries, it is difficult to argue that marginal deterioration in banks financial strength would be inimical to macroeconomic performance. Ideally, SCB and HSBC financial strength is positively associated with good policy performance. Financially weak institution generates losses which undermine business stability and call into question the credibility of their policies. In assessing banking financial strength careful examination of the policy regime and the volatility of the economic environment is necessary and conventional measures of private enterprise financial strength, profitability and capital can be very misleading when applied to banks (in, Klh and Stella, 2008).

In Asia, Hong Kong has the most developed markets in the area of mortgage financing amongst other Asian countries since, the outlook of Hong Kong is stable, supported by strong liquidity position and the absence of protracted fiscal imbalances within financial institutions. In general, SMEs in HK as borrowers may have several options for calling into mortgage for example that can be prior to maturation of payment duration and time (cited in, Chow, Huang and Liu, 2000; Hilliard, Kau and Slawson, 1998) There is the need to understand such terms as discussed below.

Prepayment this refers any payment made in addition to the scheduled payments under the original terms of the mortgage (cited in, Chow, Huang and Liu, 2000; Hilliard, Kau and Slawson, 1998)

Delinquency this incurs a monthly scheduled payment being terminated for certain period, but the cash flow may continue following delayed payment with additional delinquency interest (cited in, Chow, Huang and Liu, 2000; Hilliard, Kau and Slawson, 1998)

Default the process terminates the monthly scheduled payment but no further payment will be received from the borrower like, the underlying asset will be sold after certain period and the cash flow will be terminated by having lump sum of the selling price of the property that has to be less in transaction costs (cited in, Chow, Huang and Liu, 2000; Hilliard, Kau and Slawson, 1998)

Thus, unlike previous studies of mortgage financing, there introduces the concept of delinquency management to describe the whole process from delinquency to default (cited in, Ambrose et al., 1997; Brunson, Kau and Keenan, 2001; Charlier, 2001). When SCB and HSBC as lenders need to select either one of them to launch in the market, they should consider additional factors such as the potential size of market and customer. From the point of view of borrowers, the banks should consider their liquidity need during the selection process. For example, if SME customers do not have sufficient funds to pay the initial down payment, they may select the cash rebate mortgages even if the standard mortgage is of more benefit to them. Then, there can be assumption of constant probability functions on prepayment, delinquency as well as

default rates as such factors are not constant and varies according to diverse business environments and mortgage quality in general (cited in, Ambrose et al., 1997; Brunson, Kau and Keenan, 2001; Charlier, 2001). The study outcome incurs that SCB and HSBC upon utilizing comprehensive evaluation does reflect lower delinquency rate and it is a fact that more money in revenue form has been brought back to those banks.

METHODOLOGY

Research Design

The descriptive method of research was used for this study. To define the descriptive type of research, Creswell (cited in, 1994) stated that the descriptive method of research is to gather information about the present existing condition. The emphasis is on describing rather than on interpreting. The aim of descriptive research is to verify formulated hypotheses that refer to the present situation in order to elucidate it. Quantitative approach is useful as it helps the researcher to prevent bias in gathering and presenting research data. The phenomenon need to be explained by means of data analysis gathered through objective measurement (cited in, Gall, Gall and Borg, 2003). The ideal method has been the presence of comprehensive research with regards to the SCB and HSBC in their banking activities showing information how they are as a

lender to SME business and how SMEs as borrower to the banks mostly, in determining certain payment abilities SME utilizes to keep mutual relationships to the banks and such business strategy thus, showing relevance to the financial strength in standards.

FINDINGS

The Hong Kong sectors are being focused on developing bank mechanisms for preventing financial crises as compared to the positive financial strength within SCB and HSBC. The efforts respond to the realization although globalization can bring significant financial benefits to SMEs undertaking effective and sustainable financial standards as well as policies, liberalizing SCB and HSBC financial systems within financial issues and concerns of the financial strength (in, ASB 1999; 2005). In comparison, SCB and HSBC have set finance standards within different domain as identifying appropriate financial standards is not easy for the two banks. There guarantees the stability of financial standards within a multitude of banking operation for financial consistency and effective ruling of financial frameworks as geared towards HK SMEs within a number of bank institutions into a more precise information. As for example, Gordon Brown, have written that, there exists danger of pushing inappropriate measures for given countrys state of financial specs and institutional development within priority for implementation of the standards as carefully established in ensuring positive finance benefits (cited in,

Brown 1998 p. 8). SCB and HSBC engaged in setting standards and assessing SME strength fully recognize that creating financial standards is crucial to the banking policymakers upon ensuring financial stability into the banking sector. The presence of inappropriate finance standards and the under provision of financial reserves such as those against credit losses stand out as better examples of inadequacies that reduce the effectiveness of finance requirements based on standards. For SCB, there should be emphasizing of financial innovation as designed to carry out a productive SME banking plan as the SCB aims to build finance and banking environment and legal framework in line with SME global norms and supports banking development needs, raising HKs business competitiveness in the financial services industry, with goal of transforming SCB to become HKs most trusted financial service center. More specifically, the plan to have major strategies and certain response measures to create better financial and banking environment, thus promote better statements and cash flow management upon strengthening fundamentals of SCBs financial markets that include raising the financial services industry's GDP contribution to 20 percent in 2010 with an operational footprint for SMEs. Meanwhile, HSBC on the other side may be able to increase standards through improved strength in pricing within the market by 25 percent. Then, doubling financial standards watch out for uncontrolled risk that can be reflected in the HSBC balance sheets and for HSBC to grow the total asset value being better financial institutions as a whole. Bringing monitoring and supervisory systems that regulate financial markets and banking in HK in line with international standards, for example revising regulations on capital adequacy ratios to meet financial strength requirements. Improving SCB and HSBC in their corporate governance by requiring

several financial institutions to strengthen the internal control systems and enhancing the operational efficiency of HKs financial services industry. Thus, SCB and HSBC can create single financial body as the finance and banking groups have been compelled to follow suit, with laws and regulations being revised to create a single law and supervisory body to meet the changing needs of globalize HK economy. SCB and HSBC may establish Financial Services Law that focuses on functional rather than business issues in presenting greater financial standards challenge, as there aims to integrate HKs finance related laws and regulations and the creating of comprehensive framework that will meet future SME demands for diverse offerings in the finance and banking industry.

In credit markets, illiquidity remained a major issue, with trading volumes low and no sign of resumption of normal activity levels in the securitization markets. Then, HSBC helps SMEs grow as in addition to financial services, HSBC helps small and mediumsized enterprises grow their business by becoming more profitable and productive as well as by providing counseling service (in, HSBC Holdings Plc, 2008). Then, HSBC Living Business Awards recognize socially and environmentally responsible SMEs in Hong Kong, through seminars where SMEs can get practical advice on sustainable business practices and the website which provides information and advice on a range of corporate responsibility issues The Bank provides various counseling services to help SMEs develop and grow their business. Since 2001, HSBC has supported the Business Advisory Service program organized by the Hong Kong Trade Development Council.

Research Case: Banking criteria for SME system in such Default Rate

HSBC The HSBC Bank, as one of loan issuer, there is about customization and how value propositions HSBC delivers to specific business loan requirements for example and the default rate of SME owners that can be well managed by the banks payment services division of HSBC in their SME banking system process. Then, HSBC bank uses computer based scoring system to approve new card issues and sophisticated software allowing it to track and chase after delayed payments. As HSBC has six authorized collecting agencies and the staff of these outsourced companies has been empowered to persuade the defaulters to make payments due to the bank. Such payment activities of business agencies are strictly monitored by the bank and any complaints of harassments to customers will be promptly investigated by the HSBC authorities as the HSBC has tight rules on provisioning of loans which can be higher than SCB.

SCB

Standard Chartered Bank has revised the lending criteria only to exclude any segments that have had poor repayment history. The decision is in line with the past performance of the said segments and expecting that they may perform worse in line with the increase in inflation. The bank has outsourced collections to such SME business and monitored by SCB bank authorities and that less than 2 percent of SCB SME borrowers can be within the stage of defaulting as the bank takes measures on proactive basis to recover the dues (cited in, Bandula Sirimanna http://sundaytimes.lk/071223/FinancialTimes/ft339.html)

The banks are required to maintain capital to risk weighted assets ratios of such percentage as required by the financial system. SCB and HSBC do follow International Accounting Standards, although financial authorities in HK are active in supervising and monitoring regulations on financial institutions. In a global financial market, finance strength regulators that operate SCB and HSBC banks should think about the compatibility of the regulatory setting within standards. Through a deep understanding of SCB and HSBC SME banking business and within banking supervisory framework, financial regulators will be able to develop sound banking system as better business strategy applied towards SMEs in HK without loosing reliable financial services.

Thus, lending to the SME sectors require that the bank establishes appropriate structures for servicing the customers and learns how to successfully finance such target group within capacity building to ensure that SCB and HSBC have the required skills and technology to service borrowers in efficient way. The banks generally need collateral from borrower as guarantee towards repayment of mortgage loans as an example. SCB and HSBC could take the lead in organizing financing fairs for SMEs in order to address some of the critical aspects involved like employing of relationship managers to reach out to prospective clients and provide services to understand each other better and facilitate services adapted within ample needs. SCB and HSBC as better financial institutions must then construct profitable and efficient credit and equity programs for HK SME sector. To compete effectively in SME financing sector, SCB and

HSBC need to provide financial services that meet specialized needs of the company while coping with the high risks and costs associated. The emphasis should shift from product-based focus into customer-oriented focus for providing packages of financial services tailored to pricing needs and the potential of improving the SCB and HSBC relations of SMEs and increasing such profitability of providing financial services from within as the banking sector is different in some respects from the markets for other goods and services. A range of factors could create potential sources of market failure even if there is strong competition between banks.

Several effect on SCB and HSBC as long-term providers of finance applied to SMEs

Ideally, bank management based lending decisions on a long-term view of the market requiring values to be determined by reference to short-term movements in loan spreads and interest rates of the SME business but, there would invariably bring shortterm factors into lending decisions and that the banks behavior being influenced by financial considerations has been not supported by economic reality. For instance, some volatility injected into the balance-sheet would increase short-term pressures on lending decisions by SCB and HSBC. Changes in loan and capital spreads would have bearing on reported profit and yet the counterparty may still be debt worthy and the effect on the bank in terms of the SME payments due like, on a loan basis can be neutral. The effect will possibly be the banks being reluctance to provide long-term finance to SME sectors that may have track record of volatile credit default ratings. It

would also seem high that the finance bias in favor of floating rates would have an adverse effect on the provision and use of fixed rate lending. This results from the fact that value would be measured no longer by reference to cash flow but to the comparative difference between the fixed interest rate implicit in payments and the variable market rate. This could potentially have bearing on fixed rate lending to small and medium-sized enterprises fixed rate mortgages and the fixed rate securities markets. The general effect could be to weaken the position of SCB and HSBC as the providers of better finance to SME industry, discourage lending to the business wherein payment abilities as well as credit ratings are volatile over precise economic cycle as SMEs does attract lower levels of finance at rates that reflected the greater perceived risk. In times of economic downturn, there would be pressure on the banks to hold greater proportion of assets in high quality bonds, given the stability that returns would bring to ideal financial performance.

Assessment of Findings Comparison of HSBC to SCB in showing financial strength to SMEs

Furthermore, the following figures show findings in numbers below show how SCB and HSBC considers financial strength as major factor with such data on delay payment through such SMEs served by the two banks within certain number of days.

Example Time line: HSBC Sample: 2007 (Considering financial strength as major factor) 46000 SMEs

% of SMEs

Loan aging days (i.e. days of loan repayment delay) On 96.36 time 3.64 Delay SMEs with delay payment, spread as 1675 below:0-15 37 days 19 16-30 days 23 31-45 days 16 46-60 days > 60 5 days

SCB Sample:

(Considering financial strength along with other factor with equal weight) 13000 SMEs Loan aging days (i.e. days of loan repayment delay) On 95.47 time 4.53 Delay SMEs with delay payment, spread as 589 below:0-15 34 days 22 16-30 days 20 31-45 days 13 46-60 days > 60 11 days

% of SMEs

The above data shows how HSBC and SCB consider financial strength as a major factor for SMEs in such loan days from within days of repayment delays made by the SMEs. For HSBC for instance, there has been a total of 46000 SMEs showing that only 3.64 percent have delayed their loan payments as of the year 2007 showing only a

small percentage of delay as compared to those SMEs who paid on time comprising of 9.36 percentage of the total SMEs served by the HSBC The most delayed payment in days format have accumulated to 15 days with a total of 1675 SMEs and so on and that 16 SMEs made payments to HSBC from around 40 to 60 days and only 5 SMEs made payments in less than 5 days in duration. Thus, in comparison to SCB serving to a total of 13000 much lesser to HSBC has gained consideration in financial strength within equal weight as more SMEs paid on time loans to SCB comprising of 95.47 percent and only 4.53 percent have assumed delay of payment. The most delay is of 15 days payment time as 34 SMEs were involved and the least, less than 60 days of 11 SMEs then 22 paid SCB 16 to 30 days and so on.

The findings entail that for SCB and HSBC, effective financial strength shows a positive notion to the banking strategy success for SME banking services both banks offered and that the relationship of the bank as a lender to the SMEs as borrowers have shown balance outcomes since, most SMEs as indicated in data shows on time payment attitude for the loans they have made within the bank. This ascertain that financial strength adheres to a powerful banking operation activities of SCB and HSBC and such strategy applied within HK SMEs maybe of worth value.

Geographic location that SMEs mainly deal with, identified by sales contribution from location (within SCB) SMEs % of Delay On time Delay North America 4367 172 3.94% Latin America 361 42 11.63% European 1231 33 2.68%

UK Eastern Europe Middle East Australia Japan Korea Taiwan China

568 56 38 187 1553 292 1389 2369 12411

18 6 2 6 34 34 157 85 589

3.17% 10.71% 5.26% 3.21% 2.19% 11.64% 11.30% 3.59%

The information above explains how such geographic location shows ample strength within SMEs in certain countries as identified by sales contribution and location, this shows percentage rates of delayed payments as the most delay happens in Korea of 11.64 percent followed by Latin America of 11.63 percent and comes next is Taiwan of 11.30 percent. Thus, most on time payments is within the North America region comprising of 4367 SMEs and the least is within the Middle East by having only 38 SMEs this can be due to more strict policies imposed by the countries within the banking sector and business industry respectively.

Management experience that SMEs mainly having SMEs On time 2589 2438 2367 2689 2328 12411 Delay 22 30 106 164 267 589 % of Delay 0.85% 1.23% 4.48% 6.10% 11.47%

30yr 25yr 20yr 10-15yr <10yr

The above emphasizes management experiences in years that several SMEs have experienced in such ways having 30 years as the most time duration and less than 10 years time as the least of delayed percentage in such on time and delayed payments done by the SMEs. There shows that on time payments happens to be within 10 to 15 years with a total of 2689 SMEs comes next is the 30 years period of 2589 SMEs and so on while on the delay side it happens to be less than 10 years experience of 267 SMEs in delay followed by 164 SMEs and 106 SMEs having the least delayed of 22 SMEs with 30 years experience. The overall findings then, manifest a stable banking financial strength of SCB and HSBC and the fair finance standards valuation as duly imposed within banking operation services given to the SME business.

Group A: Group B:

HSBC DBS Standard Chartered Bank Bank of China Hang Seng Bank ICBC Citibank

Group A: Location of Borrower for Assessment Group B: Use only Financial Information
(Net income / Sales revenue) on SMEs loan product 6.38% 5.78% 6.57% 5.73% 5.82% 5.42% 5.96% (Bad debt / Sales revenue) on SMEs loan product 3.64% 3.87% 4.53% 4.27% 4.42% 4.02% 4.87%

HSBC DBS Standard Chartered Bank Bank of China Hang Seng Bank ICBC Citibank

Group C: Group D:

HSBC DBS Standard Chartered Bank Bank of China Hang Seng Bank ICBC Citibank

Group C: Management experience for Assessment Group D: Use only Financial Information
(Net income / Sales revenue) on SMEs loan product 6.38% 5.78% 6.57% 5.73% 5.82% 5.42% 5.96% (Bad debt / Sales revenue) on SMEs loan product 3.64% 3.87% 4.53% 4.27% 4.42% 4.02% 4.87%

HSBC DBS Standard Chartered Bank Bank of China Hang Seng Bank ICBC Citibank

The above bar chart shows the difference pointing to HSBC over SCB in specific group denomination wherein HSBC a part of Group A by having comprehensive assessment linking towards geographic location comparison to SCB in Group B that have application of financial information assessment only and there is Group C that adheres to management experience in comparison to Group D with use of financial information for its assessment. The comparison of bad debt ratio and what accounts for such profitability or sales revenue pointing towards SME loan product of the two banks as the

data shoes that only a slight difference occurred in percentage of about 0.19 percent as HSBC is of 6.38 percent lower than SCB of 6.57 percent thus, accounting for bad debt assumption of the banks wherein SCB is much of high risk at 4.53 percent as compared to HSBC of 3.64 percent. The information of such standardization process can be that SCB have higher delinquency rate as compared to HSBC when it comes to loans done by SMEs. Furthermore, SCB and HSBC have attempted to improve the measurement and management of financial risks by means of assigning risk ratings for certain business loans such as for SME business and it is true that riskier loans generally carry high interest rates and that such location of the business and certain management experience does integrate an effect as to why delinquency issues are present within the banking sector as there can be indication that SCB and HSBC have imposed price for experiencing too much risk as a lender to SMEs that may outcome into a delinquent borrower and by this, delinquency rates are rampant within the banks and since, SCB and HSBC can serve as a commercial or business banks to such business organizations, the graph below shows how delinquency rates strikes such as applied commercial real estate that may assume mortgage loans among SME business and it is clear that high delinquency rate is within business arena comprising of 12 percent ratio as compared to consumer usage of cards and residential estates ratio.

Source: Federal Reserve, adopted from: Calculated Risk: Finance and Economics (2008), Fed: Delinquency Rates Rose Sharply in Q1 (May 21, 2008) Retrieved at: <http://calculatedrisk.blogspot.com/2008/05/fed-delinquency-rates-rosesharply-in.html>

The above is shown because it can be of ideal purpose to research investigation wherein some financial standards are not in parallel to the banks financial statements such as those in audited report domain. Thus, banking delinquencies is rising quickly and reinforces the banks long-standing view that the surge in mortgage defaults rather than such reflection of poor underwriting standards in specific subprime process. Understanding that the main driver of the defaults is the decline in such service prices,

the increase in negative equity positions and the inability of SMEs as borrowers who encounter financial stress to continue refinance several ways out of trouble in business. Although big enterprises borrowers are quite likely to encounter financial stress than SMEs and the share of negative-equity borrowers who will end up defaulting can be much higher in the business banking sector wherein there is better outlook for the trajectory of credit losses in the global market is not different in major stance. For HK SMEs, the investment in capital goods is determined by the expected returns from investment which must be high enough to cover all costs including the cost of borrowing. Conversely, when the economy is near good employment and the price level is rising, fiscal and monetary policies aimed at keeping rates constant could contribute to an increase in delinquency among unemployed owners of business loans and mortgage accounts. The mortgage delinquency rate is positively related to the interest rates. Therefore, SCB and HSBC money policy will be boosting SME economy by lowering the interest rate in order to encourage borrowing as well as contribute to the decline in delinquency rate associated with periods of business slump. As the lower interest rate reduces the costs associated with debt outstanding, thereby reducing risks involved in delinquencies. In contrast, when bank raises the interest rate in order to slow down an economy heading towards inflation, the associated extra costs does increase the risks of default payments on debt outstanding and awareness as created by SME business. There provides evidence that expanding loans to lower income and more risky borrowers under the affordable mortgage portfolios and lending policies do contribute to the rise in delinquency rate of SCB and HSBC as the effective management policies undertaken by debt issuers have allowed the banks to reduce the

delinquencies generated by lower income and risky SME owners in particular. Indeed, by any given time, the variation in past due payments and the duration of delinquency of SME business accounts does have significant effect on such delinquency rate within the present financial time (cited in, Sissoko, Macki (2006), The Determinants of Delinquency Rate on Commercial Banks Mortgage and Credit Card Debts, Credit and Financial Management Review). The financial statements have been prepared in accordance with generally accepted accounting principles which require the measurement of financial position and results of operations without consideration of changes in the relative purchasing power over time due to inflation.

CONCLUSION AND RECOMMENDATIONS

In conclusion, the debt/credit assessment method of the two banks upon considering management experience as well as location of SME borrowers can help in reducing delinquency rate as compared to certain assessment method that only considers using financial information. The presence of delinquency rates then, incurs to certain percentage of accounts in the portfolio greater than days of past due as it can forecast future charges and subsequent losses. For instance, banks collection managers develop strategies such as campaign structures focused on reducing delinquency rates for SME banking as the financial services companies indicate that low delinquency does not necessarily guarantee low losses as it represent significant departure from

conventional collection theory, a trend experienced by many lenders in recent years. Indeed, delinquency is not necessarily good indicator for losses as strategies and technologies can be implemented that allow independent collection treatments in early stage collections from those found in the later stage. The relationship between delinquency and finance standards of such information will continue to diminish as long as there can be effective repayment as well as collection strategies throughout the delinquency cycles. Then, SCB and HSBC need to ready banking operations for a possible banking turbulence by leveraging their ability to mitigate such loss without losing focus on too much delinquency rates and accounting of bank load through the adoption of a possible effective loss mitigation approach. Aside, it is important to fully understand banking processes, policies and technologies being used for banking activity to ensure these banks are maximizing the probability of success. For example, it is important to align collection recovery strategies by credit type as ideal for small businesses. The linking credit booms with banking crises, current mortgage delinquencies in the mortgage market appear indeed to be related to past credit growth and find that delinquency rates rose more sharply in areas that experienced larger increases in number and volume of originated loans (cited in, Dell Ariccia, Igan, and Laeven, 2008). The relationships then have to be linked upon decrease in the lending standards that can be measured by significant increase in loan to income ratios and decline in denial rates, not explained by improvement in the underlying economic fundamentals. There can be deterioration in the banks lending standards within certain finance factors as standards tended to decline more wherein credit boom was larger consistent with evidence on aggregate credit booms. Lower standards are being

associated with fast rate of mortgage price appreciation, consistent with the notion that lenders were relying on the fact that borrowers in default could always liquidate the collateral and repay the loan and some changes in business structure mattered as lending standards declined where large absent institutions entered the market. The increasing recourse by banks to loan sales and asset securitization appears to have affected lender behavior, with lending standards experiencing greater declines in areas where lenders sold larger proportion of originated loans. In mortgage market most of these effects appear to be stronger and more significant than in the prime mortgage market, where loan denial decisions seem to be more closely related to economic fundamentals. The findings have to be consistent with the notion that credit growth episode within cycles of lending standard does create vulnerabilities in SCB and HSBC financial system. The experience demonstrates that even highly-developed financial markets are not immune to problems associated with credit booms. Truly, monetary tightening can reduce both the demand and supply of bank loans; its effectiveness is often limited by capital account openness. This is especially the case in small open economies and in countries with more advanced financial sectors, where banks have easy access to foreign credit, including from parent institutions. Applying policies in order to ensure that banks and SME head are equipped to deal with enhanced credit risk for certain categories of loans, limits on foreign exchange exposure and maturity mismatch regulation thus, reducing distortions and limit excessive borrowing and lending (cited in, Ho and Pennington-Cross, 2007). For appropriate recommendation as based on research findings, SCB and HSBC banking process in financial standards as measuring financial strength can be utilizing accurate details of payment schedules and

dates to avoid payment delays of such mortgages and loans made by such SMEs mention and thus by having more banking securities needed for specific finance areas as applied for Hong Kong SMEs as the businesses may have high delinquency rate as it becomes apparent that SCB and HSBC in their banking strategy are among the vital aspects for SMEs in HK to succeed and meet the goal of having satisfied clients. From this discussion, several important points had been suggested. On the other side, in order for SCB and HSBC to stay competitive, price approach must be considered upon such determination of default rates that may vary amounts for loan interests as the banks provide finance charges but give SMEs greater payment chances and time upon having better banking standards and quality and have such quantity of a particular mortgage item as by this manner, SCB and HSBC are trying to keep basic banking rates ideal upon meeting the demands of customers regarding credit usage and avoid issues of delinquent borrowers. Truly, SCB and HSBC must be able to utilize payment models for SMEs in order to generate return of revenues being used and should have the capability of prioritizing banking operations at the maximum level of financial standards and strength.

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HSBC Report, 2008 http://www.hsbc.com/1/2/newsroom/news/news-archive-2008/hsbc-holdings-plc-2008interim-results-highlights

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