Jun 26, 2019 04:55 AM

Small Firms Hobbled by Higher Bad-Loan Rates, Shorter Life Spans

Higher bad loan risks and shorter business lifespans hinder lending to SMEs. Photo: VCG
Higher bad loan risks and shorter business lifespans hinder lending to SMEs. Photo: VCG

Chinese banks have increased lending to small and micro enterprises in response to government calls, but concerns remain over the businesses’ high bad loan ratios and short life spans, according to the central bank.

Outstanding loans to small and micro businesses rose 21% year-on-year to 10.3 trillion yuan ($1.50 trillion) at the end of May, said Zou Lan, deputy head of the People's Bank of China's financial markets department, in a Monday press briefing on the release of a white paper on financial services provided to small firms.

The growth rate was 5.8 percentage points higher than at the end of last year, Zou said.

Chinese authorities since last year have taken a series of measures — including expanded rediscount quotas and targeted cuts to bank reserve requirements — to encourage lending to small businesses in a bid to bolster the economy’s slowing growth. The five biggest state-owned banks were told to expand lending to small and micro businesses by 30% this year.

But higher bad loan ratios and shorter life spans of small businesses are still concerns for lenders. According to the white paper, jointly published by the central bank and the China Banking and Insurance Regulatory Commission, the average bad loan ratio for credit to small firms stood at 3.16%, while the ratio for businesses with credit lines of less than 5 million yuan was 5.5%. The average ratio for the entire banking sector was about 2%.

Although the paper called the bad-loan risks of small businesses “manageable,” the ratio is much higher than for large enterprises. By the end of May, the bad-loan ratio of small businesses with credit lines of less than 10 million yuan was 5.9%, compared with 1.4% for large companies and 2.6% for medium-sized companies, Zou said.

Bad-loan ratios of small businesses surged from 2.75% in March 2018 to 6.3% at the end of last year, reflecting a financial crunch amid slowing business. The ratio has gradually declined since then.

Smaller scale and weaker competitiveness made SMEs less resistant to economic fluctuations, the paper found. Meanwhile, small export businesses have been hit harder by the trade tensions between China and the U.S.

The average life span of small businesses in China is only three years, compared with eight years for counterparts in the U.S. and 12 years for those in Japan, according to the white paper. That exposes financial institutions to greater risks when making loans to such clients, the paper said.

The lack of a transparent credit system, unfair competition, market access restrictions that place smaller players in weaker positions and inadequate mechanisms for protecting creditors also hinder lending to smaller companies, the paper said.

Regulators urged financial institutions to treat small businesses fairly and improve their risk-management capacity and internal management to better serve small companies. Regulators also pledged to ensure a level business playground and remove barriers facing small businesses.

Despite recent improvement, solving financing difficulties for small enterprises would be a long, complicated and arduous process, the paper said.

Contact reporter Han Wei (

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