[Archive] Mechanism for adjustment of interest rates for Non-means Tested Loan Scheme for student

LEGCO QUESTION NO. 8(WRITTEN REPLY)

Date of Meeting: 23 May 2001

Asked by : Hon YEUNG Yiu-chung

Replied by : SEM

Question :

At present, the interest rate for the Non-means-tested Loan Scheme for tertiary students ("interest rate on student loans") is set at 0.5 percentage point below the average of the prime rates quoted by the note issuing banks. The Finance Bureau reviews the interest rate on student loans at the end of each month according to the prevailing prime rate. The interest rate will be adjusted in accordance with the prevailing prime rate if it differs by one percentage point or more from the average prime rate, or if it has remained unchanged for a period over six months. Since the prime rate only dropped by less than one percentage point on every occasion in recent months, such adjustments could not be reflected in the interest rate on student loans in a timely manner. In this connection, will the Government inform this Council whether it will consider revising the adjustment mechanism for the interest rate on student loans, so that it will closely follow the movements of the prime rate; if so, of the details; if not, the reasons for that?

Reply:

Madam President,

The Non-means Tested Loan Scheme (NLS) operates on a "no gain, no loss" and "cost recovery" basis. The principle is that Government should not seek to make a profit out of the loans, nor incur a loss. On this basis, the interest rate is set at the Civil Service Housing Loan Scheme (CSHLS) interest rate, plus a 1.5% risk-adjustment factor to cover Government's risks in disbursing unsecured loans. The CSHLS interest rate, which is set at "no gain, no loss" to Government is currently 2% below the average of the best lending rates (BLRs) of the note-issuing banks. Under the existing review mechanism, the Administration reviews such rate at the end of each month and will adjust it if the rate calculated under the formula differs from the prevailing interest rate by one percentage point or more, or when the prevailing rate has remained stationary for six months. This arrangement seeks to strike a balance between administrative efficiency and concerns about possible frequent fluctuations in the BLR.

The Administration has recently conducted a review on the above adjustment mechanism and proposed to adjust the rate more in tandem with the revisions in the BLR. The intention is to review the rate at the end of each month, and adjust it in the following month according to changes in the BLR during the month. Any change to be introduced eventually will be applied to the NLS.