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The Honolulu Advertiser
Posted on: Monday, May 16, 2005

Loans costing state millions

By Sean Hao
Advertiser Staff Writer

In 1996 local crack-seed company Yick Lung filed for bankruptcy protection from creditors. Nearly a decade later, state officials remain hopeful the company — known for its "Yum, Yum, Yick Lung" ads — will repay $146,853 due on a $300,000 loan provided in 1989.

That loan is among nearly $5 million in state business development loans that were 90 or more days past due and still being carried on the state's books at the end of March.

Yickco Inc., which manufactured Yick Lung products, was dissolved in 1998, according to state records. The loan was made under the Hawaii Capital Loan Program, which ended in 2004; however, the Department of Business, Economic Development and Tourism continues to administer loans made since the program started in 1963.

As of June 30 of last year, 68 percent of DBEDT's loan portfolio was delinquent, with some loans as much as 10 years behind on payments.

The fund was designed to help businesses that could not secure loans from banks. The inherently risky nature of the loans is a major factor in the program's high delinquency rate, said Ted Liu, director for the Department of Business, Economic Development and Tourism. However, it's also a result of the agency holding out hope that loans such as Yick Lung's will pay off. That doesn't affect the state's finances, but it highlights the difficulties that arise when the state government enters the banking business.

Liu acknowledged that the government may not be the ideal lender; however, the need to provide loans to "unbankable" businesses remains. Between July 31, 2002, and June 30, 2003, DBEDT said it loaned $525,000, which resulted in 22 new jobs, though there was no accounting of whether those jobs still exist.

"Whether it's a proper place for government is still a question," Liu said. "If I were to be given authorization to do this, we would find some way of partnering with a local bank."

However, even private partnerships can run into trouble. In February the Hawaii Community Loan Fund, another lender of last resort, filed for Chapter 11 bankruptcy protection. Created in 1997, the nonprofit typically lent between $5,000 and $250,000 per loan and had received $1.5 million in contributions from Hawai'i banks, savings and loans, foundations and the city government.

Separately a recent audit of the Office of Hawaiian Affairs showed that about half of the agency's 121 Native Hawaiian Revolving Fund loans, or more than $3.3 million, were in default. Twenty more were delinquent. Haunani Apolonia, chairwoman for OHA's board of trustees, has countered that the fund's actual delinquency rate remains less than 15 percent.

The Office of the Auditor also has criticized DBEDT's loan program for failing to adequately monitor and market its small-business loans.

Despite the troubles, DBEDT still expects payment on numerous loans that are several years in arrears.

Liu has acknowledged the agency has been lax writing off bad loans in the past. Between July 1, 2002 and June 30, 2004, the department wrote off $265,081 in loans.

DBEDT said it's waiting for permission from the state attorney general's office to write off some of the bad loans, including Yick Lung's.

Bridget Holthus, special assistant to the attorney general, said collection efforts on loans referred by DBEDT continue.

"Sometimes if there are no identifiable assets it can take a long time to collect loans," she said. "Unlike with private companies there's no real tangible benefit to the state in writing off these loans.

"With private companies ... there could be tax benefits and write-offs that wouldn't apply in these situations."

Still, state agencies typically try to eliminate bad loans within a few years, said state auditor Marion Higa.

"Ordinarily, departments try to get loans written off because it makes them look bad," she said.

Meanwhile, Patti Ching, a former Yickco owner, said she was surprised to learn the old loan was still on the state's books, but declined to comment further.

Reach Sean Hao at 525-8093 or shao@honoluluadvertiser.com.