For the past two years, the China Regulatory Commission has attempted to increase small business loans, failing miserably. Many have connected the failure to its rigid requirements and have questioned the necessity of small business loans.
“The regulator had imposed three minimum lending standards for banks, requiring loans to small businesses to be no less than banks’ average credit growth rate, the number of these borrowers to at least remain at par, and the ratio of loan approvals to be no less than a year earlier.”
In order to meet the requirements regulators have imposed, some banks are forced to resort to “accounting tricks.” For example, banks have inflated the volume of loans to small businesses by adding fake borrowers on the accounts. “The requirements make sense if used as a temporary measure, but they are flawed if they were to be used as a permanent fixture.” Huang Yiping, economic professor at Peking University explained.
With China’s total outstanding credit to small businesses growing, the country has urged for the erection of more micro-finance credit companies. Currently micro-finance credit companies “are banned from taking in deposits, to provide credit support to smaller business. The volume of such firms and their outstanding credit both shrank in the third quarter, indicating a weaker momentum.”