Study On Risk Sharing And Repayment Incentive Mechanism In SME Lending

This paper disclosed the risk characteristics of SMEs (Small and medium enterprises) with high business risk and high perceived risk, and indicated that the SMEs financing difficulty is due to the fact that the high risk of SMEs is not matched with the risk preference banks in our financial market which is dominated with indirect finance. So the innovation of finance mode should be able to reduce and share risks in order to make up the gap of the risk matching. It is also the viewpoint throughout the paper.The paper started from reviewing the theories related to SMEs finance, and disclosed the shortage of previous theories related to the above problems. Then it analyzed the risk sharing mechanism of finance mechanism for SMEs from the viewpoint. Then it studied group lending (GL) and multi-banks loans pool to make up the gap of risk matching which can reduce perceived risk and sharing business risk respectively.For reducing the perceived risk, the paper studied the repayment incentive of GL by studying the selection before lending and punishment after lending, obtaining the characteristic of group formation which can decrease strategic default. The characteristic is related with social capital. It is the selection before lending. Then it studied the punishment after lending by set the punishment mechanism between SMEs. The set was proved to be effective. Then the paper compared the individual lending and the GL which has no strategic default to study whether the GL can give SMEs better chances of finance when the bank has no restriction on the upper limit of interest rate than the individual lending. The result showed that due to the self-selection programme of GL, for the same individual SME, the GL can provide a better interest rate. It will reduce the required success probability of the SME which is satisfied with the participation constraint condition, reduce the requirement yield of the success project and it will ultimately improve the chances of loans of SMEs.For sharing the business risk, the paper tries to diversify the non-system risk of small banks through the multi-small-banks'loans pool as well se to avoid the reverse problem. We design the multi-bank risk sharing contract and derive closed-form solutions, discussing the characteristics of the contract. Conclusion is that the risk sharing contract can efficiently diversify the risk while remaining the information advantage of small banks, thus providing a resolution to the SME loans.