Governments and commercial banks at all levels must join forces to explore various measures to make small business loans and financing commercially sustainable, to which effective risk management is the key, said China’s banking and insurance regulatory officials.

“If the nonperforming loan ratios of bank lending to micro and small enterprises are high, banks cannot sustain this area of business, so lowering risks is the most crucial part of the financial reform of small business loans,” said Cao Guangqun, Party secretary of the China Banking and Insurance Regulatory Commission’s office in Taizhou, Zhejiang province.

Based on strong community networks, small commercial banks that specialize in small business financing services, including Bank of Taizhou Co Ltd and Zhejiang Tailong Commercial Bank Co Ltd, rely heavily on client managers to collect information about business owners from various aspects of their lives. The information includes details on their character, family relationships, children, and whether or not they gamble or invest in stocks.

Both small commercial lenders serving a niche market and large State-owned commercial banks’ branches in Taizhou, a coastal city known for its robust business activities in the private sector, are stepping up exploration of risk management via a combination of big data analytics and client managers’ thorough investigation of small business owners, according to Cao.

To help banks understand their clients better to reduce lending risk, some cities and provinces have established platforms under the guidance of local governments, enabling banks to access a greater amount of data on private companies previously unavailable to them.

Suzhou, a major city in Jiangsu province, has launched a comprehensive financial services platform online, with the goal of helping banks assess the business performance and financial position of a company more accurately and largely reducing their marketing costs for micro and small enterprises.

The platform allows banks to access a vast collection of data provided by nearly 100 government departments for free. The data, which includes information about companies’ tax payments, utility bill payments and lawsuits, as well as business owners’ household registration records, give more accurate pictures of the micro and small enterprises registered on the platform.

By cross-checking the information with the corporate data they collect on their own, banks can verify the business and financial situation of companies to make lending decisions and implement risk-based pricing.

A government-backed credit rating agency scores micro and small enterprises registered at the platform, and banks refer to the scores when looking for clients that meet their business loan requirements.

“We will keep improving the functions and efficiency of the platform, enhancing its capability of providing comprehensive financial services, and optimizing financial technology-based risk evaluation and the use of big data, so that the platform will reach a larger number of small businesses more quickly at lower financing costs,” said Wang Lanfeng, chairwoman of the Bank of Suzhou Co Ltd, a regional commercial lender in the Yangtze River Delta, which is authorized by the local government to take charge of the construction and operation of the platform.

As of April 15, 36,292 enterprises were registered with the platform, posting financing demands totaling 603.36 billion yuan ($89 billion), of which 97 percent were satisfied by banks.

The Suzhou city government also set up a 1-billion-yuan credit guarantee fund to enhance the credit of light asset small and medium-sized enterprises that have growth potential, in support of banks’ granting of credit up to 5 million yuan to such companies based on their credibility. If a company defaults on a loan under the credit guarantee program, the fund will share 65 percent of the loan loss, banks 20 percent, and financial guarantee companies or insurers 15 percent.

Although risks have occurred on more than 20 million yuan of loans granted by the Bank of Suzhou under the credit guarantee program, the bank’s NPL ratio for this type of loan was only 0.4 percent, thanks to government compensation.

All levels of governments can do more to increase their support for private enterprises, such as ensuring a successful launching and implementation of risk-sharing mechanisms to stimulate banks to offer small business loans with no collateral, promoting the government’s sharing of information on private enterprises with financial institutions for better risk management, and further cutting taxes and fees to reduce corporate burden, said banking industry experts.

Greater involvement of large State-owned commercial banks in small business lending is also necessary, as their cost of capital is lower than that of smaller banks, said Cao with the China Banking and Insurance Regulatory Commission’s office in Taizhou.

He emphasized that banks should follow strategies of differentiated competition in terms of small business banking according to their own characteristics and advantages, to avoid vicious competition.

In Taizhou, the line of credit for micro and small enterprises is divided into several numerical categories, ranging from less than 100,000 yuan to 10 million yuan. The small business lending market is also divided into various segments, and each bank is striving to find its niche.

Hong Quan, vice-president of Zhejiang Linhai Rural Commercial Bank Co Ltd, said: “We try our best to find our bank’s competitive differentiation from large State-owned commercial lenders... and we mainly focus on loans of less than 30 million yuan each.”

Last year, the rural commercial lender in Linhai, a county-level city in Taizhou, offered new loans worth 3 billion yuan, of which more than 90 percent were agricultural and small business loans.

As of April 17, the bank had lowered its average lending rate for small businesses by 100 basis points since the beginning of this year.

“We can’t afford to lose market share. When large State-owned commercial banks started cutting lending rates for small businesses, we had to follow in their footsteps. For now, we still have room and resolution to further lower lending rates because our bank has accumulated profits in the past,” Hong said.

Regulators are guiding commercial banks, including large State-owned commercial lenders, to find measures to make their models for small business lending commercially sustainable, rather than making up for slim profits or even losses in this type of business with higher profits earned from other business segments, such as consumer loans.

“It is not true that the lower the small business loan rate is, the better. Only the rate that suits a particular bank is the best,” Cao said.