Banks Obtain More Incentives for Loan Offers to Small Businesses

Chinese authorities recently issued new regulations in a bid to encourage more loan issuance to small enterprises and improve the quality of financial services provided to them.

On October 24, the China Banking Regulatory Commission released the “The Supplementary Circular on Supporting Commercial Banks to Further Improve their Financial Services to Micro and Small-sized Enterprises (MSEs) (yinjianfa [2011] No.94),” mainly granting the following favorable policies to commercial banks which offer loans to MSEs:

• Allowing qualified commercial banks to issue financial bonds that are exclusively used for MSE-oriented loans: where a loan offer to one single MSE – to which the financial debt corresponds – is no more than RMB5 million, the loan offered can be deducted from the aggregate amount of loans when calculating the bank’s loan-deposit ratio
• Providing MSE-oriented loans with favorable risk weight: the risk weight of banks’ assets allocated in MSE-oriented loans shall be calculated as 75 percent, while risk weight of assets allocated in regular enterprises-oriented loans shall be counted as 100 percent

These incentives will enable commercial banks to maintain a comparatively low loan-deposit ratio (larger cash flow) in the tightening monetary environment and a relatively high capital adequacy ratio (a ratio between capital and risk-weighted assets that largely determines a bank’s credibility).

Circular No.94 also specified the goals of MSE-oriented loan offers that shall be reached by commercial banks, stipulating that the loan issuance to MSEs shall grow faster from a year earlier, and the growth rate shall not stay lower than the average increase rate in all-type loan issuance.

In addition, the Circular allows commercial banks to “appropriately” raise their tolerance rate to MSEs’ bad debts, based on their own average bad debt ratio in practice.

Starting from October 24, commercial banks are forbidden to charge loan commitment fees and fund management fees when offering loans to MSEs, and the charging of financial advisory fees and consulting fees are also “strictly limited,” according to the Circular.

Another recently released document, the “Circular on Extending the Effective Period of the Policy that Allows Pre-tax Deduction of Agriculture-related and Small and Medium-sized Enterprise (SME)-oriented Loan Impairment Reserve (caishui [2011] No.104)” issued by the Ministry of Finance and the State Administration of Taxation, has also followed suit and vowed to maintain a favorable tax treatment to banks that offer loans to SMEs. It confirmed that the policy – which allows the loan impairment reserve provided for agriculture-related and SME-oriented loan offers to be deducted from financial institutions’ taxable income – will continue to be effective until December 31, 2013.

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