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8/3/2019 A Comparative Study Between SCB and HSBC About Its Business Strategy Towards Small and Medium Enterprise in
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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.
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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.
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RESEARCHBACKGROUND
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 medium-
sized 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
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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.
RESEARCHHYPOTHESES
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HypothesisOne: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
HypothesisTwo: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
CONTRIBUTIONSTORESEARCHANDPRACTICE
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.
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RESEARCHAPPROACH
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.
THEREVIEWOF LITERATURE
SEVERAL FACTSCONCERNINGSCBANDHSBC
StandardCharteredBank (SCB)
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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).
HongKongShanghaiBankingCorporation (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
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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 InformationonFinancialStatements
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
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company with fresh working capital or extend debt securities to finance expansion and
other significant expenditures (in, Klh and Stella, 2003, 2008).
FinancialStrength Someconceptsandideas
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.
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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.
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Prepayment this refers any payment made in addition to the scheduled paymentsunder 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
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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
ResearchDesign
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
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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,
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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
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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 medium-
sized 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.
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ResearchCase:BankingcriteriaforSMEsysteminsuchDefaultRate
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 )
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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
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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.
SeveraleffectonSCBandHSBCas long-termprovidersof 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 short-
term 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
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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: 2007
HSBC(Considering financial strength as majorfactor)
Sample: 46000 SMEs
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% of SMEsLoan aging days (i.e. days of loan repaymentdelay)
96.36Ontime
3.64 Delay
1675SMEs with delay payment, spread asbelow:-
370-15days
19 16-30 days23 31-45 days16 46-60 days
5> 60days
SCB(Considering financial strength along with other factor with equalweight)
Sample: 13000 SMEs
% of SMEsLoan aging days (i.e. days of loan repaymentdelay)
95.47Ontime
4.53 Delay
589
SMEs with delay payment, spread as
below:-
340-15days
22 16-30 days20 31-45 days13 46-60 days
11> 60days
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
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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
On time Delay% ofDelay
North America 4367 172 3.94%Latin America 361 42 11.63%European 1231 33 2.68%
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UK 568 18 3.17%Eastern Europe 56 6 10.71%Middle East 38 2 5.26%
Australia 187 6 3.21%Japan 1553 34 2.19%Korea 292 34 11.64%
Taiwan 1389 157 11.30%China 2369 85 3.59%
12411 589
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 Delay% ofDelay
30yr 2589 22 0.85%
25yr 2438 30 1.23%20yr 2367 106 4.48%10-15yr 2689 164 6.10%
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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: HSBCDBS
Group B: StandardCharteredBankBank of ChinaHang Seng BankICBCCitibank
GroupA: LocationofBorrowerforAssessmentGroupB:UseonlyFinancial Information
(Net income / Sales revenue)
on SMEs loan product
(Bad debt / Sales revenue)
on SMEs loan productHSBC 6.38% 3.64%DBS 5.78% 3.87%Standard Chartered Bank 6.57% 4.53%Bank of China 5.73% 4.27%Hang Seng Bank 5.82% 4.42%ICBC 5.42% 4.02%Citibank 5.96% 4.87%
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Group C: HSBCDBS
Group D: StandardCharteredBankBank of ChinaHang Seng BankICBCCitibank
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GroupC: ManagementexperienceforAssessmentGroupD:UseonlyFinancial Information
(Net income / Sales revenue)on SMEs loan product
(Bad debt / Sales revenue)on SMEs loan product
HSBC 6.38% 3.64%DBS 5.78% 3.87%Standard Chartered Bank 6.57% 4.53%Bank of China 5.73% 4.27%Hang Seng Bank 5.82% 4.42%ICBC 5.42% 4.02%Citibank 5.96% 4.87%
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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
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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.
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Source: Federal Reserve, adopted from: Calculated Risk: Finance and Economics(2008), Fed: Delinquency Rates Rose Sharply in Q1 (May 21, 2008)
Retrieved at:
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,
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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
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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 ANDRECOMMENDATIONS
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
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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
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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
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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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Website:
SCBAnnualReport, Interim 2007, LeadingtheWay
http://www.standardchartered.com/about-us/en/index.html
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HSBCReport, 2008
http://www.hsbc.com/1/2/newsroom/news/news-archive-2008/hsbc-holdings-plc-2008-interim-results-highlights
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