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					Development of Small and Microfinance and Progress
             of China’s Financial Reform



     Ba Shu-song
     PhD supervisor and researcher of the Finance Research Institute
     of the Development Research Center of the State Council




                                                                       1
 Profiles
                                                           Ba Shusong
                                                  PhD supervisor and research of the Finance Research
                                                   Institute of the Development Research Center of the State
                                                   Council;
                                                  Chief economist of China Banking Association;
                                                  Member of the Economic and Trade Policy Advisory
                                                   Committee of the Ministry of Commerce; member of the
                                                   M&A Advisory Committee of Experts of China’s Securities
                                                   Regulatory Commission; member of Fund Council of
                                                   China’s Securities Regulatory Commission; expert of the
                                                   Board of Examinations of China Banking Regulatory
                                                   Commission; member of the New Basel Capital Accord
                                                   Implementation Steering Committee of Experts of China
                                                   Banking Regulatory Commission; Deputy Secretary-
                                                   General of China Society of Macroeconomics;
                                                  Former chief lecturer of the Collective Learning Panel of
                                                   CPC Central Committee Political Bureau.

Served as:   Deputy Director of the Department of Economic Affairs of Liaison Office of the Central People's Government in Hong
             Kong Special Administrative Region; Director of the Development Strategy Committee of the Securities Association of
             China; Assistant General Manager of BOCHK; vice-president of Hangzhou Branch of Bank of China and so on.


                                      Tencent microBlog: http://t.qq.com/bashusong
                                      Sina microBlog: http://t.sina.com.cn/bashusong
The Development of Small and Microfinance
and China’s Financial Reform
   In view of the adjustment of the financial structure, the advance of the market-oriented interest rate,
    and the rural financial development, etc. future financial reform will give priority to the
    development of small and microfinance.
   In terms of small and micro financial services, we should actively adjust the financial institutions,
    develop diverse financing channels and promote different financial institutions to find their
    respective positioning in small and micro-financial services, so as to meet the actual requirements of
    small and micro-enterprises.
   Loosen appropriately financial market access, and encourage the development of small loan
    companies and other small and micro-financial institutions.
   Take supporting the development of small and micro-financial institutions as the breakthrough to
    advance the market-oriented interest rate and explore the sustainable commercial pattern of small
    and micro-financial institutions.
   Encourage excellent small loan companies to turn into village banks.
   Loosen appropriately the constraints on the bank financing proportion of small loan companies.
   Issue supporting policy for small loan companies as soon as possible and reduce their tax burden.
   Support microfinance infrastructure construction so as to provide more conveniences for various
    financial institutions to participate in the competition of the small and microfinance market.
Preface— Progress of China’s
Financial Reform
   China has made considerable progress in financial reform, which is
    mainly reflected in the significant progress in market-oriented
    restructuring of large financial institutions represented by the listing of
    state-owned banks through joint-stock reform, and the great
    improvement in financial services for large enterprises. Because during
    the restructuring process, large financial institutions have gradually
    focused on their business in economically developed regions, leading to
    much progress in the financial services of cities and economically
    developed regions.
Preface— Small and Microfinancial
Services System
    The credit growth of China’s commercial banking system has been lower than
    expected since 2012

     The site research shows that, in addition to       By contrast, small and microfinance fields
      some commercial banks suffering from                are actively motivated by monetary
      limited investment and lending capacity due         authority. However, in the case of the
      to the loan-to-deposit ratio and other              steady decline of economic growth, the
      regulatory indicators, an important practical       earnings fall of small and micro-enterprises
      reason is that, the new demand for credit in        and increasing operating difficulty,
      the fields of local government investment           commercial banks are unusually cautious to
      and financing platform, the real estate             this field, resulting in the increasing
      industry and infrastructure construction have       financing difficulty of small and micro-
      strong demand for actual credit are strictly        enterprises during the economic downturn.
      constrained by regulatory policies.



    Compared with actual demands, Chinese existing financial system needs to provide more
    services to small and micro-enterprises, which calls for the breakthroughs in financial
    reform.
Preface—How to Advance China’s Financial
Reform?
     In view of the achievements
     of China’s financial reform      In view of the overall
      and the actual demands of     requirements that finance              In view of the functions of
       current real economy in         serves real economy                  small and microfinance
          the financial sector


                                       The improvement of            Its effective development can serve
      The financial services
                                        small and micro-               “agriculture-rural areas-farmers”, improve
       for small and micro-
                                        financial services is in       rural financial services, and alleviate the
       enterprises are relatively                                      capital requirements of rural financial
       lagging behind, and the          a certain degree
                                        related to the said            market; cultivate and develop competitive
       advance of the market-                                          rural financial market, open up new
       oriented interest rate is        demands for actual
                                                                       channels to meet the capital requirements
       also very prudent, and           financial services and         of farmers and small and micro-
       economically                     will possibly become           enterprises in rural areas, thus to promote
       underdeveloped rural             the focus of future            the economic development of
       areas and the Midwest            financial reform.              economically underdeveloped areas; assist
       still suffers from                                              reasonable and effective use of private
       inadequate financial                                            capitals and guide and promote the
                                                                       development of private financing norms;
       services.
                                                                       and support the development of small and
                                                                       micro-enterprises, and relieve the
                                                                       financing difficulty of small and micro-
                                                                       enterprises.
I. In terms of small and micro financial services, we
should actively adjust the financial institutions, develop
diverse financing channels and promote different
financial institutions to find their respective positioning
in small and micro-financial services, so as to meet the
actual requirements of small and micro-enterprises.
Data Analysis
   According to statistics, China has 10 million SMEs with legal personality, accounting for 99% of all
    Chinese enterprises. These SMEs create 60% of China’s GDP, 50% of China’s taxes and 80% of urban
    employment opportunities.
   The Statistical Report of the Direction of Loan Investment of Financial Institutions in the First Half of
    2012 released by the People’s Bank of China shows that as of the end of June, the small and micro-
    enterprise loan balance was 10.87 trillion Yuan, increased by 21.4% YOY, 0.9% higher than the growth
    rate at the end of last quarter, and respectively 10.1% and 5.9% higher than the growth rate of large and
    medium-sized enterprise loans over the same period. The small and micro-enterprise loan balance took up
    28.2% of all corporate loans, 0.3% higher than that at the end of last quarter. In the first half of 2012, RMB
    corporate loans had been increased by 2.85 trillion Yuan, among which 933.2 billion Yuan went for small
    and micro-enterprise loans, taking up 32.7% of all corporate loans incremental over the same period, 4.4%
    higher than the percentage in the first quarter.
   The survey conducted by China Federation of Industry and Commerce shows that 90% of the subscale
    small enterprises had no lending relationship in any form with financial institutions, and 95% of the small
    and micro-enterprises had no lending relationship in any form with financial institutions. In comparison,
    the values created by SMEs obviously don’t match with the financial resources obtained. Especially in the
    period of economic contraction, financial institutions are apt to provide more scare credits and other
    financial resources to large enterprises, which objectively squeezes small and micro-enterprises and
    increases their operating pressure.
Problem Solving
   To gradually relieve this problem, we need to help different financial
    institutions find their commercial positioning in small and micro-
    enterprise services and feasible commercial pattern according to their
    respective financial requirements. On the one hand, we should actively
    develop village banks, small loan companies and other small and
    micro-financial institutions. On the other hand, we should promote
    large commercial banks to provide services for small and micro-
    enterprises. And large commercial banks should promote customer
    structure adjustment by establishing differentiated evaluation
    mechanism and commercial patterns.
II. Loosen appropriately financial market access, and
encourage the development of small loan companies
and other small and micro-financial institutions
Data Analysis
   The strict access regulations in            In fact, this is not merely true with
    current financial sector cause               small loan companies. It can be seen
    significantly insufficient financial         from the distribution of the overall
    services for small and micro-                financial institutions that, even in
    enterprises. Even in 2011 when               small and medium-sized cities and
    private financing was very active,           towns where small and micro-
    small loan companies mainly                  enterprises are mainly distributed,
    serving small and micro-enterprises          there are not enough financial
    only had the loan balance of                 institutions that can provide
    391.474 billion yuan at the end of           financial services. The insufficient
    the current year. In the first half of       supply of financial services also
    2012, the loan balance was 489.3             results in incomplete competition in
    billion yuan, far from the demands           the financial service market for
    of market.                                   small and micro-enterprises, making
                                                 the loan interest of small and micro-
                                                 enterprises relatively high.
Problem Solving
   The strict access regulations of the         We should loosen appropriately the
    financial sector for small and micro-         regulation indicators to promote
    enterprises cause incomplete                  small loan companies and other
    competition, which directly                   small and micro-financial
    increases the financing cost of small         institutions to provide financial
    and micro-enterprises. In addition,           services, and reduce the loan cost of
    the strict access regulations bring           small and micro-enterprises by
    about significant license premium             introducing new small loan
    and usually condition financial               companies.
    institutions to operate on the basis of
    the premium brought about by
    license regulation, so there lacks
    sufficient internal motives to
    improve management.
III. Take supporting the development of small and
micro-financial institutions as the breakthrough to
advance the market-oriented interest rate and explore
the sustainable commercial pattern of small and micro-
financial institutions
Connotations of the Sustainable Development
of Small and Microfinance Institutions
   The sustainable development of small and micro-financial
    institutions means that the income obtained from the financial
    services provided by small and micro-financial institutions can cover
    its operating costs and capital costs, so as to realize its independence
    and gradual growth, and the financial sustainability of small and
    micro-financial institutions is one of the main contents.
   In general, the market-oriented interest rate can promote the
    sustainable financial development of small and micro-financial
    institutions.
Analysis of the History of the Market-
oriented Interest Rate
   From the development history, one of the reasons of the poor performance of
    China’s small credit in previous time is that the low interest rate was ever
    regarded as “poverty alleviation” as far as policy orientation was concerned.
    This, on the one hand, made commercialized financial institutions unwilling to
    engage in small credit businesses, or that financial institutions engaged in small
    credit businesses could only rely on particular external poverty alleviation
    capital, thus failed to realize the financial independence of small loan companies.
    On the other hand, the rent-seeking behavior that might be caused by low interest
    rate usually made small and micro-enterprises in real need of funds unable to
    obtain credit opportunities and funding support.
   To promote the healthy and sustainable development of small and micro-
    financial institutions, we must make them obtain necessary profits through
    normal operations. What’s important is to gradually loosen the interest rate
    regulations on the financial services for small and micro-enterprises.
The Development of Small and Microfinance Institutions
During the Process of Market-oriented Interest Rate

   During the process of market-oriented interest rate, small and micro-financial
    institutions should focus on the customer positioning of small and micro-
    enterprises; provide the financial services that can best reflect the demands of
    small and micro-enterprises; bring into play the advantages of small and micro-
    financial institutions such as the significant regional characteristics, low
    information cost, rapid business handling process and low transaction cost;
    focus on the development of small and micro-enterprise customers with
    potentials; enhance the risk management innovation of the financial services of
    small and micro-enterprises; adjust business structure and business
    competitiveness; and take the road of development different from that of large
    financial institutions.
IV. Encourage excellent small loan companies
to turn into village banks
Status Analysis
   The current regulation on village           In comparison with Interim
    banks is Interim Provisions on               Provisions on Village Banks
    Village Banks Restructured by Small          Restructured by Small Loan
    Loan Companies issued by China               Companies and Interim Provisions
    Banking Regulatory Commission in             on the Management of Village
    June 2009, which stipulates that             Banks, it is easy to find that the
    small loan companies conforming to           conditions for small loan companies
    required conditions are authorized to        to change into village banks are
    be restructured into village banks. It       much higher than the conditions that
    proposes a series of requirements on         investors directly apply for the
    small loan companies with the                establishment of village banks. This
    intention of restructuring. However,         seemingly positive guidance
    ever since its implementation, no            actually blocks the road that small
    small loan company has been                  loan companies are restructured into
    restructured into village bank.              village banks.
Problem Solving
   From the perspective of the scale of institution and customer positioning,
    village banks can make use of the advantages that large banks and small loan
    companies have in financial services, such as the risk management system and
    regulatory framework of large banks, and the regional features and flexible
    mechanism of small loan companies.
   It is necessary to adhere to the premise of “lending but not depositing”, and
    appropriately loosen other constraints if required, so that those small loan
    companies with outstanding performance in actual operation can be
    restructured into village banks and enhance their capacity of providing small
    and micro-financial services.
   Meanwhile, small loan companies seeking to be restructured into banks
    actually means to directly associate their funding resources with public funds.
    Accordingly, relevant regulations should refer to the general regulatory
    provisions of commercial banks.
V. Loosen appropriately the constraints on the
  bank financing proportion of small loan
  companies
Status Analysis
   In practice, small loan companies have weak credit qualifications and great difficulty in
    increasing funding and expanding the stock. In addition, small loan companies are defined as
    financial institutions with specific nature, which prevents them from entering the lending
    market but obtaining loans from bank as industrial and commercial enterprises. What’s
    more, the loan interest shall not be lower than the benchmark interest rate by 0.9 time, which
    leads to their high financing costs.
   According to the provisions of the Guidance on Pilot Small Loan Companies (hereinafter
    referred to as Guidance), small loan companies implement the pattern of “lending but not
    depositing”, which can put some smaller private capitals on the right track but make them
    less competitive in absorbing scale private capitals. In the institutional framework of
    “lending but not depositing”, small loan companies mainly lend the equity capitals of
    stockholders.
   But the Guidance on Pilot Small Loan Companies allows small loan companies to blend no
    more than 50% of their equity capitals into no more than two banking financial institutions,
    but the leverage of 1:0.5 is obviously a strict constraint on small loan companies and makes
    small credit institutions with narrow funding resources be confronted with the “bottleneck of
    fund supply” and cash flow problems in later development stage.
Problem Solving
   In contrast to the leverage of 10 times on          In order to control risks, we should
    the guarantee industry and the leverage of           strengthen some risk constraints during the
    more than 10 times on the banking industry           process of increasing the maximum, such as
    stipulated by current regulatory institutions,       improving the registration capital
    we should adhere to the principle of                 requirements on small loan companies,
    “lending but not depositing” for small loan          establishing the rating system for small loan
    companies and then appropriately loosen              companies and establishing the examination
    the maximum debt ratio of small loan                 and evaluation system of local financial
    companies and allow small loan companies             regulatory bodies on small loan companies.
    with strong risk control capacity to obtain          This, on the one hand, constrains the
    certain financial support, which can not             development of some small loan companies
    only effectively replace private financing           with poor risk control capacity, on the other
    and reduce in a certain degree the potential         hand, promotes small loan companies with
    risks of illegal financing and illegal               strong operating capacity to obtain wider
    absorption of public deposits, but also              development space.
    increase the lending scale of small loan
    companies and better solve the financing
    difficulty of small and micro-enterprises, as
    well as improve the economic benefits of
    small loan companies and their enthusiasm
    of legal operation.
VI. Issue supporting policy for small loan
 companies as soon as possible and reduce their
 tax burden
Constraints of Interest Rates and
Taxes
   The maximum of which can reach up to 4 times of the benchmark lending rate over the
    same period stipulated by People’s Bank of China, which provides certain risk
    compensation space for small and micro-financial services of small loan companies to a
    certain degree.
   Both the new rural financial institutions targeted cost subsidies and agricultural loans
    reward policy for county financial institutions implemented by the Ministry of Finance in
    2009 exclude small loan companies. Currently, there is no other national preferential
    treatment or financial incentive tax policy for small loan companies. On the contrary, small
    loan companies are levied 5.5% business tax additional and 25% income tax in their daily
    operations, and there is also no reduction or preferential policy in the pre-opening period.
    This policy conflict weakens the relative competitiveness of small loan companies in
    replacing private financing, and causes small loan companies to lend to borrowers at high
    interest rate, so as to seek their own profitability and development.
   The high tax costs also motivate small loan companies to push up the interest rate level for
    the pursuit of returns. This, on the one hand, leads to the high financing costs of small and
    micro-enterprises, on the other hand, increases the actual high risk tendency of small loan
    companies in selecting customers.
Comparisons with private lending             Problem solving

   In stark contrast to this, private          If the tax policy and financial subsidy
    lending activities actually don’t need       policy are beneficial to small loan
    to pay taxes and are immune from             companies, and some preferential
    strict regulations. So, high operating       policies are prepared for small loan
    costs of small loans fail to render          companies, it will not only
    small loan companies with any                effectively motivate the enthusiasm
    advantage in their competition with          of small loan industry and cause the
    private lending. On the contrary,            reasonable reflux of private capitals
    some small loan companies with               to the small loan industry with
    social funds from irregular channels         legitimate business, but also put more
    are not attracted to enter the market        private capitals into the scope of
    but directly turn to private lending.        regulation, which will be beneficial
                                                 to the stable development of financial
                                                 environment.
 VII. Support microfinance infrastructure construction
so as to provide more conveniences for various
financial institutions to participate in the competition
of the small and microfinance market
The Smooth Operation of Settlement System
and the Access of Credit System
We should strongly support micro-financial institutions to improve their infrastructures, especially the
smoothness of their settlement system and the access of their credit system, so that they can fully participate in
the competition in the banking industry. This is not only beneficial to the development of small and micro-
financial institutions, but also beneficial to the reform of China’s financial institutions. In this way, small and
micro-financing institutions can be brought into and better play their role in the financial system.


   Due to their operating nature and the                        Most of existing small and micro-financial
    structuring form, small and micro-                            institutions still have no credit system.
    financial institutions have natural                           Although they can inquire to the branches of
                                                                  the Central Bank about customers’ credit
    disadvantages in payment and                                  records, their service objects are those small
    settlement. The unsmooth settlement,                          and micro-enterprises excluded out of normal
    incapacity of conducting open business                        financial system and “agriculture, rural areas
    and handling Union Pay card business                          and farmers” and other low-end customers and
    are the main problems confronted by                           disadvantaged groups, whose credit record is
    existing small and micro-financial                            unavailable for inquiry. If small and micro-
    institutions.                                                 financial institutions can set up the credit
                                                                  record of such customers while providing them
                                                                  with services, it will undoubtedly reduce the
                                                                  information cost of other banks opening up
                                                                  rural financial services and small and micro-
                                                                  financial services.
Financial Innovation
   To focus on the goal of serving small and micro-enterprises, we also need
    advance financial innovation according to the financial requirements of small and
    micro-enterprises, permit small and micro-financial institutions to provide small
    and micro-enterprises with investment, guarantee, consulting and other value-
    added services, and establish the quality, risk and operating evaluation system for
    small and micro-financial institutions. For some excellent small and micro-
    financial institutions, we should permit them to conduct asset securitization,
    refinancing and other financial innovation business.
   We should promote small and micro-financial institutions to go deep into
    enterprises to strengthen the design of financial products and financial innovation
    tools according to the features of small and micro-enterprises’ demands for
    financial services and gradually explore a set of financial service incentive and
    restraint system for small and micro-enterprises, which can reflect the principle of
    high risk and high return and change the bad debt provision.
Thanks

				
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posted:6/14/2013
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