Borrowing costs soar for MSEs forced to rely upon expensive private lenders

Micro and small enterprises are still facing financing difficulties despite the government's efforts to support the development of MSEs since 2008.

Bankers and economic experts called for a reform of financial services and a design more appropriate for MSEs at the Boao Forum for Asia in Hainan province on April 8.

According to a survey of 1,027 MSEs in 17 provinces, autonomous regions and municipalities, nearly half said their costs of borrowing increased in 2013 and the loan interest rates went beyond 10 percent.

"Many micro and small enterprises cannot receive bank loans due to lack of collateral. They are forced to turn to private lending whose annual interest rates hit 20 to 30 percent," said Huang Rong, vice chairman of the All-China Federation of Industry and Commerce. "To solve the problem, financial institutions must make innovations of their products and services."

For a business with assets of less than 3 million yuan ($484,114), private lending still remains a major source of capital, suggesting that commercial banks still have room for improvement.

Last year, of the MSEs surveyed about 15 percent relied on private lending as their main source of capital, while more than 30 percent relied on small and medium-sized banks.

Only 12.4 percent relied on large banks, according to a report based on the survey.

Nearly 20 percent of the MSEs surveyed said their demands for capital were not met in 2013 although 40 percent had their needs satisfied. Among the surveyed enterprises that received loans successfully last year, 57 percent have medium to long-term capital demands, almost double that of the previous year.

"Some people say it's too risky for banks to make loans to micro and small enterprises and the costs of lending are too high. This kind of biased mindset must be changed to make a breakthrough in micro and small business finance," said Dong Wenbiao, chairman of the directors board of China Minsheng Banking Corporation Ltd.

"Apart from that, we should seek new business models and design a financial system to better support the MSEs," Dong said.

His bank has more than 300,000 MSE clients with an average loan of 1.3 million yuan. The bank's loans to MSEs surpassed 400 billion yuan in 2013 and the ratio of non-performing loans of its MSE clients was 0.6 percent.

Dong said China's banking industry faces unprecedented pressure in the face of accelerating interest rates, challenges posed by Internet finance and increasing financial disintermediation.

Identifying new customers has become the focus for the transformation of each bank so the community of almost 5 million MSEs is receiving increasing attention from the banking sector, he said.

During the past three years, the central government launched several policies to encourage the growth of MSEs, which alleviated the financial difficulties to a certain extent.

In August 2013, the General Office of the State Council emphasized the need to increase policy support initiatives for MSE finance.

Suggestions included supportive fiscal policies, expanding banks' autonomous write-off rights and applying differentiated regulation in areas such as business access, asset risk weighting and loan to deposit ratio assessment.

With government support various financial institutions launched products and services catering to MSEs.

Loans by financial institutions in the banking industry to MSEs increased by 2 trillion yuan in 2013, accounting for 22.5 percent of all new loans and becoming a major business growth point for the banking sector, said Dong of China Minsheng Bank.

The National People's Congress is working on the revision of the current law on the promotion of small and medium-sized enterprises. A key question of the revision is how to reflect financial support to MSEs, said Zhu Hongren, chief engineer of the Ministry of Industry and Information Technology.

To solve the financing difficulties of MSEs, Chen Zhiwu, professor of finance at the School of Management at Yale University, suggested that the government issue more bank licenses to set up private banks.

"The financial demands of micro and small enterprises will not be met unless China has thousands of private banks and private financial institutions," Chen said.

jiangxueqing@chinadaily.com.cn

(China Daily USA 04/10/2014 page16)