Download Problems and Countermeasures in Constructing Credit Guarantee

Problems and Countermeasures in Constructing Credit Guarantee
System for Small and Medium-sized Enterprises in China
XIAO Wenfeng
City College of Dongguan University of Technology, Dongguan, Guangdong, P.R.China,
[email protected]
Abstract: Small and medium sized enterprises are important part of market economy in China, which
play an important role in ease the employment pressure and enhance the economy competitiveness.
However, financing problems have been the main issues for SME development. To solve this problem,
it’s urgent to establish an effective credit guarantee system for them.
Keywords: Small and medium sized enterprises (SME); Problems; Countermeasures; Credit Guarantee;
Credit System
1 Introduction
To establish and improve the credit guarantee system can help SME finance, reduce loan risks of
financial institutions, safeguard financial security, establish good relations between bank and enterprises,
and finally promote the development of SME. China's credit guarantee industry started around the early
90s in last century. Among more than a decade, support of national policy and needs of the market made
it develop very rapidly. However, financing difficulty is still the bottleneck restricting the SME
development. It’s of great significance to further promote the healthy development of security industry
and truly set up a bridge between SME and banks.
2 Problems Existing in SME Credit Guarantee System
In general, many problems existing in SME credit guarantee system can be divided into two categories:
internal system problems and external environment problems.
2.1 Problems of internal operation mechanism existing in China's credit guarantee system of SME
2.1.1 Unitary Structure of credit guarantee institutions
At present, in terms of quantity and size of guarantee institutions, the government is in absolute control
status. In this way, it will overburden with guarantee, thus will affect its construction input in other areas,
and ultimately the country's overall economic construction and development will be limited. At the same
time, the SME credit guarantee is an economic phenomenon. With information asymmetry and moral
hazard and other factors, it’s difficult for SME to finance. In the market economy system, the
government acts as a role of macro-control and social management, whose function is to regulate the
market, set market rules and maintain market orders. In addition, as the economy develops, the number
and size of SME is increasing. The government doesn’t have enough human and financial resources that
can carry out macro-control and social management as well as credit guarantee commitment in the SME.
Therefore, the situation that the security entirely depends on government must be improved, and a wide
range of credit guarantee institutions must be developed.
2.1.2 Lack the risks transferring mechanism of credit guarantee
With the lack of clear rules and regulations for effective norms, security agencies in negotiations with
the banks are generally in a weak position, so many banks will pass on the loan risks of SME to the
security agencies, and a number of security agencies were forced to bear all the credit risks. In this way,
the loan risks are over-concentrated in the security agencies rather than reasonable dispersion with their
collaboration banks, which is not in line with international practice and will weaken the inspection and
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assessment function of bank-to-business, thus the overall risks are increased. In addition, the national
credit re-guarantee institutions have not yet been established, which can transfer and disperse risk
effectively. At the credit guarantee institutions of provincial level that has been established, with the
exception of few provincial security agencies to carry out exploration of a number of ways to spread the
risks, the vast majority of them haven’t start the re-secured business for municipal guarantee agencies
facing with SME, and the security risk has not been decentralized.
In order to reduce risk, the security agencies have to rely on anti-security measures, and some even
demand the anti-security in full. In fact, the plight of SME is that they have lower credit and lack
qualified mortgage collateral and third-party guarantor. Although the excessive anti-security
requirements of guarantee agencies theoretically reduce the risk of their own, it can not actually help
SME to solve the problem of loan difficulty, and also make their security applies become redundant and
finally deviate from the fundamental purpose of construction of credit guarantee system of SME.
2.1.3 Invalid Compensation mechanism of guarantee funds
According to international practice, some certain proportion of profits should be taken by the security
agencies as the fund to strengthen their own operation capacity, or the government provides financial
investment to make up for reduction as a result of compensation in guarantee funds. However, China's
SME credit security institutions don’t have the practice that extracting the risk reserve from profits and
even less compensation government funded. The funding source of policy security agencies is mainly
financial and asset allocation from local government, which is mainly for one-time investment and lack
follow-up funds and compensation mechanisms. Their income from guarantee fee is only as a
supplement. As a result of high risk, commercial agencies will generally increase the guarantee fee as
source of compensation, and the loan cost of SME is increased. Even if they increased security fees, due
to the restrictions of magnification, the annual premium income of security institutions, after removed
tax burden and other related charges, is also very limited to enrich guarantee funds. It is precisely
because of the lack of risk compensation mechanisms. The underwriting capacity of guarantee agencies
is weakened, compensation will make them face financial losses or bankruptcy.
2.2 The external environment problems in SME credit security system
2.2.1 Backward legal system on credit guarantee
As an important component of national financial support policy, credit guarantee system for SME needs
to be regulated by the specialized laws and regulations. In this regard, some laws and regulations
involved in SME credit guarantee industry are Corporate Law, Guarantee Law, the SME Promotion Law,
as well as departmental rules and local regulations formulated by local governments based on relevant
policies. Among them, the Company Law does not have specifically regulations for security agencies,
and the Guarantee Law is to adjustment non-professional security act of general enterprises and natural
persons, its main concern is the protection of the interests of the creditors, and the access and exit of
professional market of the security agencies, the scope and type of business, employee qualification,
financial and internal control system, self-regulation of this industry and government regulation and
other issues have not been clearly defined yet. Other policies have been issued are mainly about policy
security agencies and their application scope is relatively narrow. The current construction of legal
system against the industry protection significantly falls behind the development of this industry.
Therefore the access to markets, business operations, exit of the markets and other processes are in a
laissez-faire state, and it has seriously hindered healthy development of the credit guarantee system for
SME.
2.2.2 Imperfect credit assessment system for SME
At present, the imperfectness of China's credit assessment system for SME is performed in the following
two main aspects: On the one hand, the credit investigation system for SME develops very slowly. The
registration and consultation system of the Central Bank has just established, and commercial credit
information system is still backward. For a very long time, the credit investigation is only operated by
the banks based on their own business needs and there are few credit institutions specializing in such
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activities. On the other hand, credit assessment system for SME is not perfect. Below the existing
system, there are very few credit rating agencies that is large-scale, specialized and authoritative,
including Dagong International Credit Rating, but their business size and capacity is still very limited.
Generally, credit rating services of SME is done by some small accounting firms or auditors’ offices.
With fewer restraints, credit rating agencies break faith from time to time. At the same time, when
commercial banks determine the credit rating of SME, they use the same standards with large
enterprises, rather than theory and methods in accordance with international practice. The existence of
these problems make rating deviate from the actual business. Thus, a number of SME which have
development prospects and good performance can not get loan preferential due to the credit rating and a
few SME which have poor performance obtain bank loans, then it will bring credit security institutions
and collaboration banks greater operational risks
3 Policy Recommendations about Development of China's SME Credit Guarantee
System
3.1 To improve the internal operation mechanism of SME credit guarantee system
3.1.1 To establish a wide range of credit guarantee institutions
As China’s credit guarantee industry has a low development level and the industry has its own high risk,
to establish a wide range of credit guarantee agencies, so that policy security institutions, commercial
security agencies and mutual guarantee agencies can simultaneously develop, has practical significance
for optimization of the structure of SME guarantee system. At the premise of giving full play to the role
of the policy security agencies, commercial guarantee agencies and mutual aid guarantee agencies
should be encouraged, especially the rapid development of mutual guarantee institutions should be
encouraged. The diversity of credit guarantee institutions can be developed from the following aspects:
First of all, regulate the operation of policy security agencies. The government should further regulate
policy security institutions and make their advantages fully release. At the same time, uphold the basic
operating principles of the policy capital market operation, and avoid excessive administrative
interference. Government should make sure the policy security institutions are operated in accordance
with the operation system of the company, establish a modern enterprise system, and clearly clarify the
rights relations between the government and institutions. For example, the policy security institutions
can entrust the operation and management of guarantee funds to professional guarantee institutions.
Secondly, make full use of commercial security agencies. The commercial security agencies have their
own advantages, a sound internal control mechanism, a reasonable mechanism for the distribution of
benefits and a higher professional level. Due to existing internal and external economic environment, it
is relatively difficult for them to develop their business. However, they can focus more attention on the
business that policy security institutions can not provide security as a result of their limited financial
resources. Through the continuous improvement of commercial agencies and economic environment at
home and abroad, a solid foundation can be laid for the future of their development. Therefore, their
input can be increased in a place that its market economy is maturely developed.
Thirdly, encourage the development of mutual guarantee institutions. They can not only effectively
reduce the cost of SME financing, increase the loan amount and enlarge loan period, but also reduce the
formalities of bank loans, the time of procedures processing, thereby the cost of transactions and
information is saved. Learned from Italian experience of mutual guarantee model of SME, we can set up
an association of SME in various industries, which is responsible for communication, coordination,
information sharing and mutual guarantee organization forming. In order to increase the credit of the
organization and make it widely recognized by society, the government can become a share holder by
giving a part of funds. At the same time, allow the association to raise from the public funds, this could
make more effective use of private capital, so that mutual guarantee institutions of SME will grow up
quickly, and provide better services to the development of SME.
3.1.2 Establish the mechanisms of risk diversification and transferring
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At present, China's credit guarantee system has been established, but the operating mechanism of risk
diversification and transferring has not yet been fully established, which is an important reason
constraining the development of China's security system. Therefore, we should set up risk
diversification and transferring mechanism in the following aspects:
First, establish re-secured system to spread the risks. The so called re- secured system refers to secure
the security again after the debt has been set security, and this act is an important protection way to
decentralize and transfer the security risks. In China's credit guarantee system of SME, either the
individual agency or the security system in a certain region, and their ability to prevent and avoid the
risk is limited. Therefore, China's credit guarantee system of risk diversification should learn from
foreign experience: while the security agencies assuming security responsibility, it will have a certain
percentage of risk re-secured, and then a part of the risk will be undertaken by re-secure agencies. In this
way, when some small and medium-sized enterprise defaults and needs the security agencies to pay,
re-guarantee institutions and security agencies will afford the payment based on the agreed approach and
proportion. At the same time, the re-secured agencies can also be re-secured again, and shift some risks
to the national re-security agencies. With multi-level anti-security, the risks of security agencies have
been decentralized and transferred for the maximum. China's re-establishment of security agencies can
be divided into two levels, namely, national security agencies and the provincial re-guarantee
institutions. Among them, the main task of the national security agencies is to solve the re-secured issues
of the provincial security agencies, and the main task of the provincial security agencies is to solve the
re-secured issues of guarantee institutions of the province. This multi-level security mechanism can
increase the magnification of security institutions, which is conducive to the expansion of security size
and can avoid some risk loss.
Secondly, establish risk-sharing mechanisms with cooperative banks. This can strengthen exchanges
between security institutions and cooperative banks. And the establishment of information
communication and information-sharing mechanisms can avoid loan risks as a result of asymmetric
information. At the same time, risks of security business should be undertaken by the two sides in a
certain proportion and can not be secured only by the company. This will also prevent banks neglecting
loan inspection because they don’t have risk of credit guarantee. In the operation process, the People's
Bank and China’s Banking Regulatory Commission should issue guidance and allow banks to share
risks with the security institutions. At the same time, strengthen the coordination with the head office of
commercial banks, supervise the implementation of their relevant policies, and build the risk sharing
cooperation with security agencies as soon as possible.
Third, establish an effective compensation mechanism of secured funding. Compensation mechanism
for funding is the key sector in sustainable operation of SME credit guarantee system. In the actual
operation of the security industry, with the increasing business, compensation funds will be required for
the corresponding increase, the limited guarantee fee and interest income will be difficult for security
agencies to maintain the normal operation of their own. If there is no effective mechanism to guarantee
compensation funds which funds the security agencies for a long term with stability, security agencies
will continue to reduce their size and normal business will be difficult to hold. Drawing on international
experience, governments of most countries annually budget some funds as compensation for the SME
credit guarantee system for the main source of funding, which fundamentally guarantee the normal
operation and sustainable development of SME credit guarantee system. For China, the Government
may consider allocating certain annual fund from budget as the basis, and set aside certain amount fund
from the Science and Technology Development Fund loan or from interest discounts of technological
transformation as compensation for the risk of security agencies, and it can also make other investors
compensate security agencies by means of tax policies, and gradually form the compensation
mechanism of SME credit guarantee that has Chinese characteristics and is also in line with
international practice.
3.2 Improve the external development environment for credit guarantee system of SME
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3.2.1 Improve legal system of the credit guarantee
The sound system of laws and regulations is the foundation of SME credit guarantee system of
developed countries, and also an important guarantee for the healthy development of the industry. Now
credit guarantee industry in China is going through a rapid development period. To improve the related
legal system is a key act for sustainable and rapid development of China’s SME credit guarantee.
In building the basic framework of laws and regulations of SME credit guarantee, we should focus on
improving its legislative level and maneuverability. Secured credit laws and regulations are the
principles to coordinate SME credit guarantee institutions, secured enterprises, collaboration banks and
the rights and obligations between governments, also the legal basis for supervision and management of
the national credit guarantee institutions of SME and credit guarantee markets. The practice of SME
credit guarantee involves multi-party economic mainstay, and its legal relationship is quite complex,
which can not be adjusted by the rules and regulations of the department. Therefore, in order to
overcome the limitations of the existing regulations, it’s urgent to develop the laws and regulations of
security industry which is higher than the level of department rules. In addition, the relevant released
policy documents has many drawbacks, such as narrow application scope, lack maneuverability, so the
upcoming laws and regulations of credit guarantee should have broad applicability. Also it should have
a stronger maneuverability, that is it should have specific provisions in the establishment of security
agencies, market access, code of conduct, legal liability and risk-taking so that they can provide
operational standards and practical legal protection for the operation of credit guarantee system for
SME.
3.2.2 Construct SME credit system
Construction SME credit system is a comprehensive credit management system, which includes not only
credit management system of companies and individuals, but also the establishment of fair professional
credit assessment bodies. While building a credit system for SME, two aspects should be focused on in
China:
First, establish the authoritative credit rating agencies. Government should pay close attention to the
establishment of development standards and operational requirements of such institutions, by building
the new agencies or transforming the existing credit rating agencies. At the same time, credit rating
agencies should also enhance their professional and technical level, promptly update information of
SME, make a comprehensive analysis based on survey information and continuously improve the
efficiency of credit information. The purpose to establish credit rating system is to increase the credit of
SME. If its credibility is questioned, it has lost the meaning of its existence. Therefore, the management
institutions of credit guarantee agencies should hire professionals periodically to assess the credit of the
credit guarantee institutions, and make assessment results public to enhance transparency of their
internal management and business operation, so that lenders truly understand the security capacity of the
security institutions. In this way, Lenders can streamline the review procedures for loan guaranteed by
some credit guarantee agencies with good record, and SME can access financial support quickly and
timely.
Secondly, strengthen construction of internal control system of the security agencies. Security agencies
should be required to operate in accordance with the rules of market economy and establish a scientific
system of property rights of security agencies. At the same time, establish a standardized modern
enterprise system, and improve legal person management mechanism, develop standardized articles of
association, perfect management system and prevent any form of administrative intervention. In addition,
the establishment of credit system of security agencies should be as the foundation of the industry.
Based on solid credit strength, establish a scientific operation mechanism and standardize the scope of
business operations.
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