More loans will not be enough to save SMEs
- Source: Global Times
- [04:09 September 24 2009]
- Comments
By Wu Huaiting
"Who will be the next factory owner to run away?" is the biggest concern for factory workers, local government officials and manufacturing suppliers in the Pearl River Delta after the global financial crisis worsened the capital chain of local small and medium-sized enterprises (SMEs).
Already troubled by increasing labor costs and strained liquidity, delays of payment or even cancellations of orders from overseas clients have put a lot of local SMEs out of business.
A new policy rolled out Tuesday by the State Council is part of a government effort to shore up SMEs hit in the economic downturn.
SMEs have not received support proportional to their economic and social significance during the financial crisis.
Though SMEs make up 99 percent of China's enterprises, contribute 60 percent of China's GDP, supply 50 percent of China's tax revenues and create 75 percent of China's urban jobs, SMEs received only 5 percent of the 4.8 trillion yuan ($700.3 billion) recently pumped into China's financial system.
The new policy signals the government's recognition of the problems facing the development of China's SMEs.
First, loans are to be made to rescue an SME from a temporary lack of capital. However, financial lending is not charity and cannot sustain the long-term development of a company.
Without new strategies, loans from banks and governments will go wasted. The most urgent thing at this time is to improve SMEs' creativity and capability to innovate.
Secondly, without specific and enforceable policies and effective supervision systems, the government's guidelines for increasing the liquidity of SMEs may be just good wishes.
It is widely known that the reluctance of banks to lend to SMEs lies in the high default rate on the loans. With an 11.6 percent default rate on loans to SMEs compared with a 2 percent general default rate on loans at the end of 2008, it is natural for many banks turn down credit applications from SMEs.
Even should the government establish a guarantee system on loans to SMEs financed by the state, local governments and enterprises, it would be very challenging to provide enough money to underwrite all the loans necessary to maintain the liquidity of China's SMEs.
Without enough security, small incentives and favorable policies will not be alluring enough for commercial banks or private capital to ignore the risk of lending to SMEs.
Last but not the least, even if the government can get banks to lend to more SMEs, not all SMES are worth saving. It would be naive to loose lending restrictions to all SMES, which would only raise loan default rates and further endanger the financial system and the country's economy.
A revision of lending standards that considers SMEs' specific characteristics, such as growth patterns, current market situation and quality of leadership, might be a more realistic way to increase banks' investment in SMEs.
The infusion of capital is just a short-term solution. A more favorable and sustainable environment for SMEs is needed.
