State-owned bank leverages big data, internet to increase funding avenues for small businesses

China Construction Bank Corp applied financial technologies such as big data to the innovation of digital operating models and reconstruction of the credit granting process during its strategic development of a framework for financial inclusion.

The second-largest State-owned commercial lender by assets in China created accurate customer profiles by introducing more than 30 categories of data from the government and third-party institutions and cross-check the external data with the internal data from the bank to solve problems of information distortion and information asymmetry that exists between financial institutions and small businesses, said Liu Guiping, president of China Construction Bank.

To ensure the development of financial inclusion, which means that individuals and businesses have access to affordable financial products and services that meet their needs, the bank has realized smart risk management by innovating several hundred data models and having risk control standards embedded in its system.

After the COVID-19 pandemic broke out this year, the bank increased credit supply to small businesses and combined efforts to stabilize enterprises, sustain employment and promote the development of financial inclusion.

At the end of the first half of this year, its outstanding balance of inclusive loans to micro and small businesses with a total credit line of up to 10 million yuan ($1.46 million) per borrower reached 1.26 trillion yuan, up 51.5 percent year-on-year.

The number of clients that still have inclusive loans at the bank increased by almost 30 percent year-on-year to 1.59 million.

CCB launched policies to incentivize client managers at various levels of bank branches to ramp up credit support for small businesses.

It lowered the funds transfer pricing rate assigned to inclusive loans by up to 165 basis points, compared with the FTP rate assigned to other types of loans.

Funds transfer pricing is a method used by banks to measure how each source of funding contributes to their profitability and to measure the performance of different business units of a bank. The cut in the FTP rate assigned to inclusive loans allows the bank to offer loans to small businesses at lower rates than before.

CCB also increased the performance appraisal score associated with inclusive loans to 13 out of 100, up from 5 out of 100. The evaluation requirement is higher than regulatory requirements.

"We hope to extend the lifespan of micro and small businesses by supporting them with the issuance of inclusive loans," Liu said on Monday.

For the majority of small businesses that received loans from CCB, their average lifespan is five to six years, whereas the average lifespan of small businesses in China is about three years.

Under its current business model driven by financial technologies, the bank's nonperforming loan ratio of new inclusive loans was less than 1 percent, down from over 4 percent in 2017.

At the end of the first half, the ratio of its collateral-free loans for small businesses to inclusive loans rose by 3 percentage points from the end of last year. The number of new clients that have never received loans from banks increased by nearly 40,000 during the first six months.

With the aim of helping small businesses get through hard times, CCB also allowed 80,000 small businesses hard hit by the pandemic and facing temporary liquidity difficulties to delay payments on principal and interest of loans worth more than 40 billion yuan by the end of June.

Since the pandemic started, the bank has lowered its rate of new inclusive loans by 0.75 percentage point. On this basis, it has further cut the lending rate for businesses that were temporarily affected by the pandemic by 0.4 percentage point, Liu said.

China encouraged banking institutions to strengthen risk management, reduce their costs and improve efficiency for small business lending by adopting financial technologies.

The China Banking and Insurance Regulatory Commission's Zhejiang Office launched an online provincial-level platform of comprehensive financial services in November.

The platform gathered a large amount of data from 54 provincial government departments, which accounted for 70 percent of the information on a business that client managers need to know when they conduct due diligence before a lending decision is made, said Zhang Yourong, spokesman of the CBIRC's Zhejiang Office.

With the help of the platform, client managers are now able to complete pre-lending investigations in a few minutes, rather than a few days.