Lending difficulties
Business lending difficulty in China is a social problem, not entirely attributed to fellowships themselves.
First, a vital amount of companies, especially state-owned enterprises, have weak prestige awareness, resulting in low bank prestige ratings. With many loans from banks have come to be overdue loans, market banks are reluctant to issue more lending.
Second, some local governments, especially grassroots governments, do not have strong prestige awareness, either. In firm possession restructuring process, confident grassroots governments even treated bank debt retirement as a way to unload firm burdens. Thus sacrificing banks for firm reform is not an uncommon phenomenon.
Third, state-owned market banks still possess less reasonable systems, less unblemished mechanisms, and less comprehension of policy directions. market banks of policy need to emphasize financial security, but they should also perceive sales and marketing aspects by identifying and cultivating clients. For deposit money absorbed from the society, market banks should lend as much out as possible, in order to generate profits. If a market bank is unwilling to sell products (loans), but instead sitting at home waiting for customers, then this is surely not yet conformed to the true meaning of a market bank.
Inefficient mechanism
A lot of funds idle within the banking system, while many reasonable financing demands cannot be complete creating the dilemma of hard lending and hard borrowing. This is mainly due to some existing problems within the principles and mechanism of the big four market banks (Industrial and market Bank of China, Bank of China, China building Bank and Agricultural Bank of China).
First, lending authority of grassroots bank branches have been removed, resulting in cumbersome loan approval process. Many county-level branches are only for deposit taking, with no lending rights. Some municipal level branches are able to issue working capital loans, but not fixed asset loans in most cases. As many fellowships belong to county and municipal levels, if they ask fixed asset speculation borrowing, the application will need to go through the ranks to the provincial head office. When the hierarchical approval processes are completed, the speculation opportunity is already gone.
Second, the interest rate setting mechanism is unreasonable due to "deposit up and lending down", creating disincentives for grassroots bank loans. Some bank head offices currently have two tactics to discourage grassroots lending. The hard tactic is restricting the lending possession of grassroots branches, while the soft tactic is letting grassroots branches to pay the interest on deposits. So how could grassroots branches deliver doing if they are not allowed to lend? The only rejoinder is to deposit the money with higher level branches, hence the soft tactic. Therefore many grassroots branches take deposits, and deposit them with higher level branches, thus development about 2% interest rate differential profits. Head offices uniformly deploy the funds, most of which goes to big projects in eastern coastal areas and large cities, exacerbating the funding constraints in remote, inland and county areas.
Third, some state-owned market banks have asymmetric motivating and restraining mechanisms, giving limited incentives to loan officers to sell.
Fourth, market banks do not have strong prestige awareness, incompetent in identifying and cultivating clients. Some state-owned market banks are still of the mindset of government enterprises: long on deposit and approval, short on lending and sales. Commonly speaking, lending should be a thorough work, with 3 examination steps: strict risk analysis before lending, close monitoring during approval process, in order to cope with any changed client circumstances, and on-going quote after issuing loans. Many market banks currently only focus on pre-lending analysis, a level rejection if conditions are not met, and no more reviews after loan authorization. State-owned market banks are also not financially innovative, resulting in loss of good clients.
Fifth, mortgage difficulties. The most vital mortgageable assets in many Chinese fellowships are land and buildings. But various estimate agencies authorised by housing bureaus and land bureaus charge multi-layer fees, and assets estimate terms often differ from borrowing terms. All these practices will impact on firm financing and bank lending process.
Solutions
In order to ease this "business borrowing hard and banks lending hard" issues, we have proposed a "337" solutions.
What is the "337"? The first "3" is the handling of three relationships. One is the association in the middle of stable monetary policy and continuous economic and employment growth. Two is the association in the middle of financial risk arresting and firm amelioration support. If firm amelioration cannot be supported, banks will also face higher risks. Third is the association in the middle of firm reform and preventing failure to repay bank debts.
The second "3" relates to the classification of companies. In the first category are fellowships of less than 10% of the total, with benign operating conditions and potential prestige ratings. Their good prestige profiles are already assets, so market banks should enhance financial innovations and serve these clients better. The second category contain of less than 20% of total, which are fellowships uncompliant with national industry policies, development chronic losses, badly managed, prestige unworthy and debt promulgation avoidance. No more loans should be in case,granted to these companies, or banks will be supplementary dragged into loss. The remaining 70% in the third category are fellowships with mediocre performance, maybe negatively affected by future shop changes, but still with interest repaying abilities.
In this regard, we have 7 recommendations: One, encourage market banks to lend to potential companies. After joining Wto, there are more and more foreign-funded financial institutions and independent foreign banks arrival in, and policies for them are becoming more and more favourable. Competition in the middle of banks will be more severe, with a single focus on good potential clients. Therefore banks need to be more financially innovative when lending to potential clients, as well as providing other ancillary services.
Second, advance working capital lending in grassroots branches, while riskier fixed asset financing can be reasonably controlled by senior branches.
Third, advance loan sales estimate and develop sales incentive schemes
Fourth, develop a sound social guarantee principles and enhance asset mortgage management. The function of estimate agencies set up by local government bureaus should be for possession definition only, while issues such as valuation, re-assessment and estimate terms should be determined by banks and companies.
Fifth, speed up the amelioration of scholar financial institutions for small-to-medium enterprises, in single institutions under reformed systems.
Sixth, develop prestige awareness among companies. They have to understand that relinquishing debts can only solve short term difficulties. With no supplementary bank funding, a firm is likely to remain in a difficult situation, and a prestige unworthy firm cannot come to be a strong company.
Seventh, local governments should regulate prestige orders in the society, creating a benign environment for fellowships and banks. To help firm development, governments should generate a prestige protection zone, instead of naturally relinquishing debts to lighten firm burdens. For example, local government may set up task groups to get data on potential companies, potential projects, wholesome working capital demands and fixed asset projects within a province, and ask state-owned banks, municipal banks and foreign banks to participate. This could effectively enable borrowers and lenders to meet each other, and facilitate the communication in the middle of funding victualer and users. As we can see, even without direct intervention, there are still a lot of services and directing works local governments can do. If they are properly done, banks will feel comfortable, too.
In short, the lending difficulty issue is due to many facets and is a unabridged reflection of social problems. The stakes belong to companies, as well as banks and local governments, therefore a trilateral cooperation is necessary.
Resolving Hard Lending and Hard Borrowing in China