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Lack of reliable credit data slows Chinese bank lending to small businesses

Chinese banks remain cautious over extending credit to small and midsize enterprises because of a lack of reliable credit information on SMEs, said the former head of the country's largest bank.

Although Beijing has cut reserve ratios for banks and urged them to lend to companies hit by global trade tensions and the slowing domestic economy, the funding needs of SMEs are still not met, Jiang Jianqing, former chairman of Industrial & Commercial Bank of China Ltd., told delegates at the 15th China International Finance Forum in Shanghai on Dec. 16.

The availability and credibility of credit information are two main challenges faced by banks when assessing lending requests from small businesses, Jiang said.

"It could develop into a vicious circle if banks refuse to lend due to rising default concerns," he said.

In China, SMEs account for more than 60% of the GDP and 80% of total employment, according to the country's central bank. However, the average nonperforming loan ratio of SMEs were 120 basis points higher than the average ratio for midsize and large enterprises as of end-March, which has stoked concerns about credit risk in China's banking sector.

In the past, many SMEs relied on shadow banking to fund their operations. But as the government started cracking down on excess credit outside the banking system, funding became particularly tight for small businesses. According to Jiang, outstanding loans to SMEs totaled more than 25 trillion Chinese yuan as of end-June.

To address increasing liquidity stress, the government has encouraged banks to lend more to the economy, small enterprises in particular. It has also cut required reserve ratios four times since the beginning of the year to free up more cash for lending.

Jiang urged Chinese authorities to strengthen regulations on credit fraud and information authenticity.

"A nationwide, public credit database that covers both enterprises and individuals is needed to help SMEs secure funding," he said, adding that banks should take the initiative to gather or verify SMEs' credit data by leveraging financial technologies.

As of Dec. 14, US$1 was equivalent to 6.91 Chinese yuan.