China should build technological capabilities and explore digital lending options to address the financing problems of micro and small enterprises, experts said.

“If we can make breakthroughs in digital financial inclusion, financing costs of small businesses would be reduced significantly. China can even be the global leader in this field with a solid data foundation, if we try hard,” said Ding Yu, a senior consultant with the Chinese Academy of Financial Inclusion at Renmin University of China.

Traditionally, small business lending requires a large number of personnel. For instance, to decide whether or not to offer a loan to a small dumpling house, loan officers have to go through the restaurant’s flour purchase invoices to find out how many dumplings it makes every day.

But changes have taken place. Loan officers can now retrieve data on the amount of flour purchased from a logistics and distribution company, in addition to data on the restaurant’s revenue from mobile payment platforms like Alipay and WeChat Pay, to make model-based big data analytics.

This will help commercial banks and credit unions reduce operating costs and improve the ability to identify risks, Ding said.

As financial technologies are continuously upgraded and widely spread, they will provide strong support to financial inclusion in terms of channels and risk-based pricing, said analysts with Changjiang Securities Company Ltd in a research report.

Nowadays, internet and mobile internet technologies are deeply integrated with various aspects of everyday life and corporate development, enabling online and mobile lending platforms to connect borrowers with lenders at lower costs.

With the rapid development of technologies such as cloud computing and big data, multidimensional models for risk management are built based on all kinds of real information, including social networking, taxation, and industry and commerce. Compared with traditional models of lending which are based on collateral and standardized financial data, these new models are more flexible and diversified, and will effectively lower the marginal cost of similar loans, according to Changjiang Securities.

A joint report by the International Finance Corporation and the SME Finance Forum has found that formal micro, small and medium enterprises in China have unmet financing needs of $1.89 trillion every year.

Although China is highlighting the importance of giving stronger financial support to micro and small enterprises, financial institutions in general have neglected screening the use of loans carefully. Many companies obtained funding because of their connections rather than their business performance, which led to further structural imbalances in the Chinese economy, said Ding, who urged Chinese regulators to tighten supervision on the flow of loans.

“To support micro and small enterprises, we must clearly define the use of small loans so that the money will truly flow to the real economy, the part of the economy that is concerned with actually producing goods and services. Regulators have a large amount of work to do in terms of making rules on how to limit the use of loans to micro and small businesses and how to handle problems caused by speculation,” he said.

He said that regulators should take a hard line on small business owners who intentionally violate rules and forbid them from using the loan amount for real estate or stock market investments as the money was granted for the healthy development of the real economy.

In his opinion, lack of motivation was the main reason why many large and medium-sized commercial banks were not keen on offering small business loans.

“Speaking of small business lending, technology is never the problem, as long as we continue to localize and optimize technologies. What counts is whether a commercial bank is willing to serve small clients,” he said.

A few commercial banks, such as Bank of Taizhou Co Ltd and Zhejiang Tailong Commercial Bank Co Ltd, have devoted most of their energy to small business lending instead of capital market operations. They understand that the Chinese economy can only rise along with private enterprises and that commercial banks should follow in the footsteps of these companies, whereas speculation is just a method of short-term investing.