The financial fallout from Hong Kong’s post-pandemic business climate continues to stress government-backed lending programs, with the 100% Guarantee Product under the Small and Medium Enterprises Financing Guarantee Scheme (SFGS) seeing a sharp rise in bad loans and associated bankruptcies. Although the popular full-guarantee scheme stopped accepting new applications in March of last year, underlying debt issues are increasing rapidly, prompting intensive recovery efforts and deep concerns about potential abuse.
By the end of October this year, authorities reported that cumulative guaranteed bad loans under the 100% product reached approximately HK$26.4 billion across 12,400 applications. This translates to an alarming cumulative default rate of 18.4%. While this figure remains below the assumed overall default rate of 25%, the trajectory is steeply upward, reflecting persistent challenges for smaller enterprises navigating economic uncertainty.
Rapid Deterioration of Debt Portfolio
The pace of default acceleration is particularly notable over the past 12 months. Government data highlights a dramatic jump in the default ratio, which skyrocketed from just 5.49% in October 2023 to 17.7% by the close of August the following year. It further edged up to 18.4% by the end of last month. In monetary terms, the bad debt tally under this specific scheme has swelled by HK$900 million in the two months since August alone (when the total stood at HK$25.5 billion).
The SFGS program includes other guarantee tiers, which have fared better but are also recording losses. The 80% and 90% guarantee tiers reported cumulative bad debt ratios of 5.5% (HK$5.5 billion) and 4.5% (HK$1.3 billion), respectively. Collectively, the three products now account for an estimated HK$33.2 billion in problem loans, underlining significant post-pandemic pressure on both small firms and the public coffers guaranteeing their survival.
Aggressive Recovery and Legal Action Underway
The increase in bad debt has triggered extensive legal and recovery efforts by lending institutions. As of the end of September, lenders were actively pursuing 11,675 defaulted cases under the 100% scheme.
The consequences for guarantors are severe:
- 2,861 cases involved guarantors entering bankruptcy proceedings or being made bankrupt via court order.
- 2,833 additional cases are facing enforcement actions, including winding-up petitions and other necessary legal proceedings initiated by authorities.
These actions underscore the severity of the financial distress among a segment of Hong Kong’s SME community that relied heavily on the government lifeline.
Addressing Concerns Over Misconduct and Fraud
Beyond standard defaults, a troubling pattern of alleged misconduct has emerged, intensifying scrutiny of the scheme’s implementation. By the end of October, 3,714 applications under the 100% guarantee product were flagged as potentially irregular, involving forged documents or the submission of false and misleading statements. The combined loan value of these suspicious cases totals approximately HK$10.8 billion.
The fraud concerns are divided into two main categories:
| Category | Number of Applications | Value of Loans (Approx.) | Status |
| :— | :— | :— | :— |
| Rejected during Vetting | 1,579 | HK$5.2 billion | Rejected by insurer/lenders |
| Flagged Post-Drawdown | 2,135 | HK$5.6 billion | Identified after funds dispersed |
The mortgage insurer and cooperating lenders assert they have taken appropriate action, including the critical step of referring suspected criminal cases to law enforcement agencies and providing detailed documentation to support ongoing investigations.
While the SFGS provided much-needed liquidity during a difficult period, the confluence of rising defaults, bankruptcies, and alleged criminal misuse will inevitably intensify regulatory focus. Moving forward, authorities are expected to heighten scrutiny of underwriting standards, bolster post-drawdown monitoring, and assess the path to normalcy for the thousands of firms still navigating an evolving economic landscape. This analysis will be crucial for protecting public funds while ensuring equitable access to future support programs for genuine businesses.