The Matching Situation of SMEs Credit Guarantee in Zhejiang Province

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					       International Council for Small Business 48th World Conference
                     15-18th June 2003, Northern Ireland




The Matching Situation of SMEs’ Credit Guarantee in Zhejiang Province


                          Professor Minglong Yao

                     School of Business Administration
                            Zhejiang University

                            Correspondence:
                          Zhejiang University
                       Hangzhou, Zhejiang Province
                              P. R. China

                          Tel: +86 571 8694 5203
                         Email: mlyao@hzcnc.com



                                  Yi Bao

                            Doctoral Candidate
                   Faculty of Business and Management
                            University of Ulster

                             Correspondence:

                                   8K10
                    University of Ulster at Jordanstown
                              Newtownabbey
                                Co. Antrim
                                 BT37 0QB
                             Northern Ireland

                          Tel: +44 28 9036 6151
                          Fax: + 44 28 9036 8232

                         Email: y.bao@ulster.ac.uk
         The Matching Situation of SMEs’ Credit Guarantee in Zhejiang Province

Abstracts
There is now little dispute that future job creation in South East of China, especially in Zhejiang
Province, will come largely from the small and medium enterprises (SMEs) sector. Although
historically most of SMEs is family-based with internal capital funding, the availability of access
to external finance such as loan from bank has been playing the key role to finance the growth of
SMEs .The Aim of this study is to identify strategies for supporting the development of a „credit
guarantee structure‟ throughout China and also to investigate the performance of such structure as
a source of crucial improvement in common credit-shortage of SMEs in Zhejiang Province in China.
The specific objectives of this study are
       To examine the gaps in external finance measured by bank‟s loan in this region
       To understand the role of credit guarantee in both finance and economy by improving
        SMEs‟ credit
       To investigate the performance of all kinds of credit guarantee organizations(CGOs)
        currently in supporting financing of the SMEs locally in Zhejiang Province
        To make some recommendations about the most appropriate ways to develop a China
         sound credit guarantee system
This study contributed an insight into the challenges facing CGOs in terms of performance in
South East of China. It draws upon responses from survey and in-depth interviews conducted in a
quite large scale which were sponsored by Central Government in Beijing. The survey used 400
responses derived from over 2000 postal questionnaires distributed and answered by directors in
SMEs in 2001. The second source of data was derived from in – depth interviews with 80 CGOs,
as well as a lots of local banks and governments.All data were calculated by SPSS10.0
The results of the above studies indicate that SMEs still rely on bank loans as crucial source of
finance. Because of the lower credit thanks to lack of „track record‟ or guaranty pawn, which
makes SMEs inability to provide sufficient certainty that the money borrowed will be repaid and
especially difficult to obtain a loan, extra credit guarantee is deadly required to support the finance
of SMEs in the region.
A guarantee is a contingent liability of the guarantor – that is, it is a potential liability not
recognised in accounts until the outcome becomes probable in the opinion of the company‟s
accountant.The concept of credit guarantee here means a scheme that relieves the financier of part
of the risk that cannot be covered by the SME itself. Focussing on SMEs it is the share of risks
with lending institutions by compensating (part of) the loss on a loan default and support
entrepreneurs with sound viable projects but unsatisfactory collateral or credit history to meet
requirements of a lending bank.
The government needs an overall strategy to encourage and support the development of an
efficient credit guarantee system for the sustainable development of SMEs based on best practice
in other countries but adapted to the Chinese specific business context.
In conclusion, this study demonstrates in detail the current matching situation of demand and
supply in the market of SMEs‟ credit guarantee. The CGOs have already played a key role in
providing credit support both to banks and SMEs, but there is still a big room for them to improve
and perform.

Key words SMEs Credit guarantee CGOs                  Matching situation
 The Matching Situation of SMEs’ Credit Guarantee in Zhejiang Province
      –      An Exploratory Study of Performance of CGOs in Zhejiang Province



A. The developing situation of local SMEs’ Credit Guarantee System
With the number of SMEs registered more than one million, Zhejiang province in China is really a

big SMEs‟ homeland where the SMEs have been playing a key role in the growth of region

economy . Meanwhile, the credit guarantee activities for Zhejiang SMEs have increased quickly

since they emerged in China about five years ago. There are two indexes , one was the number of

credit guarantee organizations and another was the number of ones being experimented by the

National Economy and Commerce Committee, that make the development of credit guarantee in

Zhejiang province leading to the rest part of China,

Table 1 The reasons by which banks reject to loan                      (from banks’ view ,multi-choice)

                       Short of          Lack of                          Short of     Enterprises
    Views                                                    Other
                    efficacious          guaranty                          project     Low credit       Overdue loan
  from banks                                               reason
                    guarantee             pawn                            prospect        rank
  % of total
                         58.8             44.5               12.7           8.0              8.0                0
   answers
  Sequence                 1                 2                3                4              4                 5

Table 2 The reasons by which banks reject to loan (from enterprises’ view ,multi-choice)
                                                                                                     Lack of good
  views         Short of          Lack of                                                            communication
                                                 Complicated         Enterprises low   Other
  from         efficacious        guaranty                                                              between
                                                    procedure          credit rank     reason
  SMEs         guarantee           pawn                                                              enterprises and
                                                                                                         banks
% of total
                  71.9             43.9               18.2                 7.2          7.2               6.0
 answers
Sequence           1                 2                 3                   4             4                 5

(A)The Background of the SMEs’ Credit Guarantee

According to our survey, so far ,borrowing money was the main financing channel used by the

SMEs in Zhejiang Province where bank loan took the absolutely dominant station in external

finance. In our samples, 21.9% of total SMEs borrowed loan from banks as their only external

fund and 87.6% of total SMEs took the bank loan as their premier indirect financing channel. But,

at least a quarter of SMEs had experienced being rejected by banks. The chief reasons explained

by both banks and SMEs were quite same as lack of credit in SMEs based on less or no guaranty

and guarantee (Table 1 and Table 2). To solve these problems, the key countermeasure is to offer
more credit supply for SMEs.

Table 3 Three-level guarantee system structure (money unit: RMB¥10,000)

                                     City-level   County-level    Town-level    Total

  Organization         Number           10             50            20          80

   Guarantee           Average         1,173          858            127        715

   fund/capital         Total         11,730         42,920         2,540      57,190

                    Proportion (%)     20.5           75.0           4.4        100.0

  Accumulative          Total           705           2658           241        3604

 number of SME
                    Proportion (%)     19.6           73.8           6.7        100.0
   guaranteed

  Accumulative         Number          1,227         6,441           955        8,623

   guaranteed
                    Proportion (%)     14.2           74.7           11.1       100.0
    contracts

  Accumulative         Number           64           1,846           164        2,074

   guaranteed

 contracts under    Proportion (%)      3.1           89.0           7.9        100.0

RMB¥100K each

  Accumulative         Number            8             1             0.0         9

   guaranteed

    contracts
                    Proportion (%)     88.9           11.1           0.0        100.0
   over RMB

¥10,000 K each

  Accumulative          Total         93,738        328,142         28,279     450,160

guaranteed amount
                    Proportion (%)     20.8           72.9           6.3        100.0


(B) Structure of Three-level Guarantee System
There are 80 credit guarantee organizations (CGOs) totally in Zhejiang Province by
the end of year 2001. In which, 41 CGOs have been listed in the formal experimental
range by the National Economy and Commerce Committee. On the activities‟ scale,
these 80 CGOs operated separately and independently in cities、counties or towns, and
were shaped to a typical three-level guarantee structure where the ones of
county-level were dominant ( Table 3). It consisted of those of 10 city-level、50
county-level and 20 town-level .Unfortunately, there was still neither province-level
CGO nor one as the re-guarantee company hitherto.
As the contribution share in the whole guarantee business, city and town-level
guarantee organizations took up 6.3% and 20.8% of total accumulative guaranteed
amount, while county-level guarantee organizations took up 72.8% of it. In the accumulative

guaranteed contracts, the county-levels were also in the dominant place.

(C) Guarantee Fund Raised

At the end of year 2001, the guarantee fund in Zhejinag Province had been raised up to RMB

¥0.57 billion, in which, the government took up RMB¥0.38 billion,accounting for 65.7% of it;

the enterprises and individual took up RMB¥ 0.19 billion,accounting for 34.3% of it。There are

24 CGOs that owned wholly by the governments and 16 CGOs contributed entirely by private

capital. The rest of 40 CGOs were joint-invested by the governments and enterprises.

Guarantee capital distributed dispersedly among the guarantee organizations, and their scale in

average is quite small. For instance,the number of CGOs owned fund less than RMB¥5 million

each accounted for 65% of total (Table 4)。

             Table 4 The guarantee capital’s distribution

  Guarantee capital (RMB10,000)     ≤100     ≤200      ≤500      ≤1000      ≤2000       ≤5150

    The accumulative number of       13        31        52        64         77          80

               CGOs

   The accumulative percentage of   16.3      38.8      65.0       80.0      96.3        100

         organizations (%)

The contributor or investor could adopt whatever of cash、real estate or other assets as his

investment resource although the cash asset was the most popular one. In the total guarantee fund

of RMB¥0.57billion, the cash asset occupied RMB ¥0.46 billion and it accounted for more than

83% of total capital raised.

 (D)The CGOs’ Types
According to the Guarantee Law, the form-in-law of the CGOs can be organized as artificial

persons of enterprise、government organization or juridical association. In the 80 CGOs, there

were 59 guarantee companies (artificial persons of enterprise),10 government organization and 11

juridical associations.
                The CGOs at present can be sorted into three types from the guaranteed objects too. Type one is

                so- called total-blocked guarantee, which only offered guarantee to its‟ shareholders or members.

                Type two is half-blocked guarantee, which offers guarantee not only to its‟own shareholders or

                members , but the SMEs inside the popedom with qualified state. Type three is open-guarantee, its

                guaranteed objects are not limited.
                (E)Guarantee premium and interest rate on loan guaranteed

                While the minimum of the guarantee premium was 1‰(per month), the maximum 7‰, and the
                average 1.5-2.26‰. Meanwhile,the RCCs (Rural Cooperative Credits) in cooperation offered the
                highest rate (their average price for guaranteed loan was 6.5215‰monthly), the four national
                banks in cooperation offered the lowest one (5.6913‰, Table 9).

                Table 9 The List of Average Interest Rates and Guarantee premium for loan
                                                      Local Commercial
Termed 3 months             Four          National                                                               Underground
                                                            Banks             RCCs           City Banks
      in 2001                      Banks                                                                         Loan Market
                                                     (excluded city banks)

 Monthly          Mean              5.6913                  5.6987            6.5215              5.7119            8.0550

  Interest      Sequence              5                       4                   2                 3                  1

 Rates(‰)         Range            4.5-8.31                4.78-6.7          4.2-8.615           4.62-7.76          0.6-15.0

 Monthly          Mean               2.06                    1.50              1.54                2.26

 Guarantee      Sequence              2                       4                   3                 1
                                                                                                                     N/A
 premium
                  Range            1.0-6.33                 1.0-2.0           1.0-3.9             1.0-7.0
    (‰)




                B. the Average Performance of CGOs
                 (A) Development of Guarantee Business

                Till the end of year 2001, the total accumulative number of SMEs that had been guaranteed by

                CGOs was 3604(Table3). The number of accumulative guarantee contracts amounted to 8623, and

                the loan that had been guaranteed amounted to RMB¥4.5 billion (7.87 times as much as the

                Guarantee capital RMB¥0.57 billion). The number of SMEs just in being guaranteed in 2001

                amounted to 1850, and their guaranteed balance was RMB¥0.96 billion (1.68 times as much as

                the Guarantee capital balance). Although the longest term of single contract was 15 months,the 80

                CGOs in most time offered credit guarantee mainly for short-term loan,to say in three months .
                (B) Social Benefit Situation
Although the growth of credit guarantee is not the only reason to explain the improvement of

social benefit such as the increment of employment、sale income and EBIT in the SMEs ,it is out

of question that the positive effect of credit guarantee does exist. If the other conditions kept

unchanged in our samples, it was estimated that the social benefit from SMEs in Zhejiang had

increased by about 30% in average thanks to the SMEs‟ employment added by 21.1%,sale income

added by 30.7% and EBIT added by33.0%.
Besides,Credit guarantee from CGOs dit cut off the bank‟s risk quite a lot.For example,by 2001,

the accumulative amount of loan assets guaranteed by CGOs was valued at RMB ¥4.5

billion ,but in which the banks‟ loss was zero.

(C) Micro-performance Analysis

1.earning status

It is noticeable that 17 in 80 CGOs‟ have nothing but zero compound income by 2001.

In general, the premium income is the main part of revenue to the most of CGOs and the other

kinds of income such as that from CGO‟s investment were quite small. In our samples, the average

margin( rate ) from investment in guarantee fund is only 2.19%.Besides, the structure of assets in

CGOs was so far not good enough to keep theirselves sustainable development .

The profit in CGOs as a whole was RMB¥ 5.3 millons In 2001,where the 40 CGOs made profit,

compared to 30 in just balance and 10 in loss.

2.substitution of payment

In our samples, there were 23 CGOs that had experienced the payment‟s substitution for the failed

SMEs. The total substitute payment was RMB ¥ 18 millions, it‟s equal to 0.4% of the

accumulative loans guaranteed.
 (D) Risk control

1.Amplified multiple of guarantee capital

Amplified multiple = guarantee amount issued / guarantee capital .Amplified multiple 5 was a

benchmark in guarantee industry .In our samples, 52 CGOs got the amplified multiple just 5, one

got the lowest 3 and two got the highest 10 . The average amplified multiple was 5.22. It means

that the guarantee industry in Zhejiang basiclly accorded with the target and regulation of present

policies.

2. Risk reserve.

In the 80 CGOs, there were 42 organizations without any reserve for risk, the rest of 38 CGOs had
picked up risk reserve as much as RMB¥11.1million totally . In average, the risk reserve each

was only RMB¥139 thousands. The fact above reflected that a majority of CGOs were still in

their status of short-term behavior and the guarantee industry as a whole was quite fragile to the

business‟ high uncertainty (due to the shortage of self compensation).

3.Cooperating with banks

Theoretically there were dozen of banks, to name several such as the four largest state-owned

business banks in China、city business banks and RCCs, which the CGOs can cooperate with in

guarantee activities. In fact most of CGOs (64 in 80) chosed a RCC as their co-ordinator.In other

words, most banks but RCCs were lack of momentum so far to take part in the finance business

involved in SMEs.

In practice, it is most popular that a CGO should undertake the all credit risk singly to
guarantee the SME for bank‟s loan (to say 55 in 80,or 69%of total CGOs did so).
There were only 25 CGOs permited to share the credit risk with their partner-banks,
the share of risk from 9:1 to 5:5. In general, the relationship between the CGO and
bank yet waited to improve or upgrade.
However, it must be noticed that without the cooperation of banks, it will result in a marvelous
discount to the performance of credit guarantee system. In our investigation, 23 enterprises among
over 400 SMEs claimed ever being denied by banks totally for 40 times or RMB ¥22.7million in
2001, no matter the fact that the borrowers were guaranteed by CGOs .

C. The Voice from SMEs
In order to understand the matching situation between demand and supply of credit
guarantee market in Zhejiang, some relative questions were made to discuss . The
data from the SMEs‟ answers were divided into tables 5 to table 8 .
One question was about the familiar degree of the SMEs to their local CGOs.Depending on the
answers listed in table 5,we found that near 10% of SMEs had no knowledge and then 28.6% of
that “know little” about the local CGO, while had 169 enterprises (42%of total) not only knew it
well but succeeded in winning at least one guarantee contract each.There was 2% enterprises that
had applied for guarantee but failed. It appears ,for the popularity and influence , that CGOs still
have a long way to go. Meanwhile, the public propaganda about credit guarantee needs to beef up.
Another question here was about the effect originated from the credit guarantee. In table 6,
47.0% of the SMEs believed the effect was “common” and 26.1% “big” while only 9.4%
“unawareness” plus “no effect” . Obviously, credit guarantee business did make some helpful
effect in relieving the SMEs‟ financing difficulties in Zhejiang Province.
                      Table 5 About Familiarity with the Local CGO
   Familiar Degree         Know           Know              Applied for           Applied for        No            Total
         To                nothing        Little          Guarantee, but           Guarantee        Reply

        CGO                                                     Failed            and Succeed

     Numbers of              38           115                     8                  169             72             330

     Enterprises

Percent of Answers or        9.5          28.6                    2.0                42.0           17.9            100

   Enterprises(%)

      Sequence               4              2                     5                      1            3               /

      Table 6 The Effect of Credit Guarantee for Relieving SMEs Financing Difficulties
       Effects               Big           Common                  No Effect       Unawareness       No reply         Total

                           Effect               Effect

     Numbers of             105                 189                         7                31            70             402

     Enterprises

Percent of Answers or       26.1                47.0                        1.7           7.7             17.4            100

   Enterprises(%)

      Sequence                2                    1                        5                4             3                  /

     Table 7 The Degree of Difficulty to Obtain the Credit Guarantee from the CGO
 Degree of Difficulty      Very Hard            Hard            Not Hard           Easy           No Reply           Total

Numbers of Enterprises           20              84                160              22              116              402

Percent of Answers or
                              5.0               20.9               39.8             5.5             28.9             100
    Enterprises(%)

      Sequence                    5                3                    1            4               2                    /

As to the the degree of difficulty to obtain the guarantee from a CGO, we knew from table 7
that 39.8% enterprises felt “not hard”to win a credit guarantee contract, 20.9% “hard” , 5.0%
“very hard” against 5.5% “easy” .

                        Table 8 Something wait to be improved (Multi- choice)
   Present Problems          Over-high                 Miscellaneous              Over-small               Bad      Others

    Wait Overcomed            Premium                    Procedure                 Quantum               Service

     Percentage(%)                 46.1                    43.3                      49.7                  8.6        3.6

       Sequence                       2                     3                            1                  4             5

What were the leading complains existing in the credit guarantee service?Table 8 had given us
some answers . The problem listed first in sequence was the shortage of supply in guarantee
quantum due to the fund limitation and regulation (answers up to 49.7%), the second , third and
fourth ones were the over-high premium(up to 46.1%),the miscellaneous procedure (up to 43.3%)
and the bad quality in service (up to 8.6%). Table 8 implied some important meanings that
unless we can improve our present system of credit guarantee by the ways as enlarge
guarantee capital, lower guarantee premium, shorten miscellaneous procedure and
qualify the guarantee service, the performance of CGOs couldn‟t be good enough to
match the huge credit demand from the hundred and thousand SMEs.
D. Conclusion
As far as SMEs in Zhejiang Province were concerned, the credit guarantee business is still in its‟

exploring and experimental phase. Although the amount 80 CGOs had played an important role in

supporting the development of local and district economy by offering credit guarantee for SMEs,

there were quite a few problems that blocked the match of demand and supply in credit guarantee

market.
In analyzing the reclaimed questionnaires from 80 CGOs and more than 400 SMEs, a basic

conclusion can be drawn:The first factor that restricted the enlargement of SMEs in Zhejiang

province is still the indirect financing problem, and the key beyond is credit shortage in SMEs.

Assumed that other conditions kept stationary in our time horizon, it can be concluded
that the social benefit from SMEs in Zhejiang had increased by about 30% in average , thanks to

the SMEs‟ employment,sale income and EBIT added. Meanwhile, the micro-performance

were existed in many ways too.
Although the credit guarantee system so far had made certain effect in relieving the financing

difficulties for SMEs, the extent of which was relatively limited. What that undermine the

performance of guarantee business were listed as follows: 1) shortage of guarantee funds. Taking

an example for Zhengjiang Province, facing to over one million SMEs, less than RMB¥600

million of the total guarantee capital from the all 80 guarantee institutions were always negligible,

which will easily result in the puzzle of save one but kill more; 2) Irrationality of the property

structure in credit guarantee industry with the government‟s finance burden of 65.7% in guarantee

capital raised ; 3)Lack of    risk compensation (not only lack of risk self-compensation in each

CGO, but failed to build a re-guarantee system as the final guarantors ; 4)conflicts between

banks and CGOs; 5)problems from guarantee mechanism. Besides, as far as the form of guarantee

scale is concerned, the introduction of civilian capital is very important, but the high risk in

guarantee investment was not worth to its low return by now. Moreover, the human capital
accumulation was very feeble in the most of CGOs. It‟s reasonable that no more social capital

dared to join the guarantee industry unless the environment of credit guarantee get improved

significantly.




References:

  1.Beijing Time(2002):” Capacity building key to SME growth: China “Sunday, August 25, 2002
  2.APEC Committee on Trade and Investmen(2002),“The Highlights of the APEC Survey on
     Small and Medium Enterprises”, Ministry of Economic Affairs. Chinese Taipei,2002
  3.Anthony Saunders(1999)“Credit Risk Measurement”,John Wiley&Sons,Inc. PP19~36
                                :
  4.Neil Gregory and Stoyan Tenev(2001),“The Financing of Private Enterprise in
  China”,Finance &development,IMF, March 2001, Volume 38, Number 1
  5.The America Embassy in Chian(2002):”China‟s SMEs: room to grow with WTO”,
     http://www.usembassy-china.org.cn/econ/smes2002.html

  6.G.W. Haynes(1995):“Credit Access for High-risk Borrowers in Financially Concentrated
     Markets: Do SBA Loan Guarantees help?”, Small Business Economics, 8, 449-461, 1995
  7. M. Cowling (1998): “Regional determinants of small firm loans under the U.K. Loan
     Guarantee Scheme”,Small Business Economics, 11, 155-167, 1998

				
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