China's Sme Credit Rationing Phenomenon

Sustained growth of the large number of SMEs is indispensable to a country'seconomic stability. The role of SMEs is essential, particularly in stabilizing theeconomy, creating job opportunities, exporting and the provision of social services.Whether SMEs can develop healthily is directly related to all aspects of China'seconomic development. Chinese government is working to create the necessaryconditions for the development of SMEs to solve all the problems. While our countryis in the transformation process of economic regime, difficulty in getting credit is theprimary factor and the bottleneck which hinder the development of the SMEs.SMEs rely heavily on internal financing in the survival and the development, butat the same time internal financing will be restricted by some factors like the profitability, the net asset scale and the anticipated income and so on. Because the degree ofthe constraints is excessively high, the conflict between the credit supply and demandpromotes their external financing needs.Due to various reasons, the SMEs are unable to get finance in the bond and stockmarket, and bank loan becomes the most important resource for the SMEs. But for thereason of the transformation process of economic regime, the SMEs are sufferingserious credit rationing from banks. This article makes effort to find out reasons of thecredit rationing phenomenon, and to propose the corresponding suggestion.There has been quite many western economics literatures on the credit rationingproblem, and the definition of credit rationing also varies a lot. According to the needof analysis, this article puts forward its own credit rationing concept. The majorcontribution of S-W model in 1981 was to introduce the information asymmetry andthe moral hazard to the analysis in the credit rationing, and to explain the creditrationing problem theoretically, therefore it becomes the main model to analyze theSME credit rationing.There is limitation while S-W model is applied in China. The western creditrationing theory grew under the background of modern credit market. The research ismainly on the information structure between both parties of the credit contracts,particularly on both parties' micro-economic behavior, and because of the limitationof the assumptions, it is not concerned with the costs of loans, enterprise bankruptcycosts, classification of SMEs and etc. The paper adds some local factors to thediscussion, so that the model is more suitable to China's credit market analysis.The banks classify the different enterprises due to the degree of informationasymmetry;the characters of the economic transformation process cause banksmisbehaved;the excessive cost of financing makes the SME in a disadvantageousposition. The above reasons course the credit rationing to SMEs. Through the analysisof functions it shows that: in the regulation of lending rate, SMEs are seriouslyrationed, so they have to fall back on rent-seeking and informal financing;after theliberalization of interest rates, banks can set lending rate differently, thus, creditrationing to SME groups should be relieved, but there will be obstacles for SMEs toobtain loans from banks, while the motivity for banks seeking profits is less strong,and pricing ability for credit risk is inadequate.Bank-enterprise credit process is a process of a game. Because of seriousinformation asymmetries between banks and SMEs, the game is an imperfectinformation game process. Bank can get the critical of subjective probability byjudging SME's project risk and by comparing the SME' utilities of no repayment withrepayment. When subjective probability is smaller than the critical, the bank believesthat enterprise will repay, and it will provide the credit. But the reality is that thecritical is too low, and bank's subjective probability is high, which causes the bank tochoose "not lending" strategy.Customer manager is a very important aspect in the crediting process. The qualityof customer manager affects both risk identification of the bank and the informationasymmetry, and the incentive method to them will directly affect their workingefficiency. Now customer managers bear great responsibilities in credit, with the lackof incentive mechanism. For the perspective to maximize the utility, they tend not tofinish their duty and result in credit rationing to SMEs.In year 2006, private capital enters into the SMEs credit market. Through a S-Wextensive mode, it shows the meaning of informal finance to the credit for SMEs. Itwill bring substantive impact only when the volume of private capital further expands.From the views of the government's purpose or of informal finance's operating goal,in the short term, alleviation of the SME credit rationing phenomenon will be lessuseful.Based on the analysis of bank profit-maximizing behavior, bank-enterprise gameacts, customer manager's self-benefit behavior and the impacts of informal finance, itdraws out the reasons of credit rationing to SMEs, with not only informationasymmetry factors, but also unsound system factors of enterprises, banks andregulators. Correspondingly, the author makes the following recommendations: takingmeasures to improve information symmetries in the credit market;supporting thelong-term development of SMEs;deepening structure reform of the bank to makemore profits;attaching importance to the liberalization of interest rates, efficientfinancial services system and other related system for SMEs in order to promote itsdevelopment.