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The Honolulu Advertiser
Posted on: Wednesday, June 13, 2001

Editorial
Reforms needed at Capital Loan Program

While it is searingly obvious that changes are in order in the state's Hawai'i Capital Loan Program, the underlying concept of the program remains both viable and needed.

As reported by staff writer John Duchemin, more than half of the $11 million in loans under this program are delinquent or unrecoverable. This is a rate far in excess of what similar programs in other states experience and is way ahead of other small-business loan programs in Hawai'i.

Part of the problem, apparently, is that this loan program was being used as a venture capital loan program when, in fact, it should be targeted at a different group of clients. Thus, some of the money went into speculative or risky efforts that are appropriate for venture capital but would not qualify for more standard loans where the expectation of repayment is higher.

Pure venture capital loans are, effectively, a gamble. One expects to come up empty most of the time, but when a business succeeds, the lender owns part of the action so he recoups far more than the loan plus interest.

It is unclear why this particular loan fund has had such a serious delinquency rate. State officials acknowledge that their lending standards were inadequate, that manpower is short and management systems inadequate.

It would seem that improvements in these areas, if they knocked down those outrageous default rates, would pay for themselves in short order.

There is another issue at play here as well. The state has been clearly reluctant to step in and close down businesses that are behind in repayment, and for good reason.

The purpose of the Capital Loan fund is to start new businesses or maintain struggling businesses with long-term potential to provide jobs for Island residents and tax benefits for the state. Shutting down a firm, then, is counter-productive.

But there is a time when the state has to set aside the aloha spirit and become more hard-headed. Keeping one company alive on this artificial form of life-support simply means there is less available to loan to others.

There is good news here. Even with the delinquencies, the program has been self-supporting, that is, has subsisted on interest income without any fresh appropriations, since 1990. And the payment history of more recent loans seems to have improved.

This is a good program and potentially a productive use of taxpayer money. Clearly, that potential won't be reached until the proper reforms are put in place.