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SMEs still struggling with scarcity of funding options

(Global Times)

08:46, July 12, 2013

While Chinese regulators have been devoting more attention to the financing needs of small- and micro-sized enterprises (SMEs) over the past several years, banking credit allocation for these businesses has so far failed to meet demand. With large State-owned banks still reluctant to lend to SMEs, further development of the micro-credit industry is essential to feed these cash-starved businesses with the money they need to grow.

Although China's big commercial lenders have sufficient capital and other social resources to continue setting up branches in the country's second- and third-tier cities, they generally offer standardized financial services and make almost no efforts to cater to the financing needs of local micro-, small- and medium-sized enterprises.

By contrast, small regionally-focused financial institutions would be in a much better position to interact with local businesses and provide customized lending services to meet local credit demand. Policymakers and planners need to develop the country's micro-, small- and medium-scale financial institutions - such as its rural credit cooperatives, rural banks and regional banks - to assist SMEs. These institutions exist already, but their position in the domestic market is still very small and quite weak compared with China's leading commercial lenders.

Meanwhile, as it may be due to the risks inherent when lending to SMEs that big banks are unwilling to extend them credit, an appropriate regulatory mechanism should be established to evaluate the default danger facing micro-, small- and medium-credit financial institutions. Until such a mechanism is put in place, favorable policies - such as tax reductions - should be given to financial institutions to offset the risks they may be exposing themselves to through loans to smaller businesses.

This is not to suggest though that banks should be the only cash source for SMEs - the private capital market should also play a major role in delivering funding to this important portion of the economy. Many believe that China's financial sector should open further to private investment in order to create a more comprehensive and efficient financial structure. But the strict controls which exist over this area now mean that the financial sector is still ill-equipped to service the funding needs of SMEs. Even in 2011 when private lending was booming, the total outstanding loans of micro-credit companies only reached 391.47 billion yuan ($63.81 billion) at the end of that year, well below what the market needed.

The challenges plaguing SMEs in search of funding cannot be entirely resolved simply by giving a handful of private lenders special approval to operate. Once control over access to the lending market is relaxed, relevant authorities should set up basic entry threshold requirements in terms of capital and operational risk controls to create an open, transparent and fair environment for private investment.

The article is based on an interview by the China Business News with Wu Guojun, vice president of the Shanghai Advanced Institute of Finance of Shanghai Jiao Tong University.

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