China's small and medium-sized enterprises represent a huge opportunity for lenders, but they must ensure that their loan officers are equipped with the skills to properly assess risk, said Mark Stewart, the newly-appointed China Country Manager at Omega Performance, a professional training provider for the financial services sector.

While three successive cuts to China's reserve requirements for banks since November 2011 should have a positive effect on long-term liquidity, the inherent level of risk in lending to SMEs is higher, making it more important than ever that banks make informed lending decisions, he said.

"More banks seem to now be focusing hard on SME and micro-lending, so borrowers should be experiencing a greater willingness on the part of a greater number of banks to talk to them," said Stewart. "However, banks know they need to develop the skills and capabilities of their loan officers. They need to be able to assess and interpret not just financial statements but also cash flow, business operating cycles, supply chains and market and industry risk. It's also important that they manage the increased risks of lending to SMEs by insulating such loans from other revenue streams to minimize the impact of any future business or market volatilities."

Stewart is no stranger to China's financial sector. Prior to joining Omega Performance, he worked for IBM as the head of its Banking Modernisation China Team. Originally from the UK, Stewart worked for a number of years in the Treasury and Lending division of the Co-operative Bank before joining IBM, initially for a four-year stint as an associate partner in Financial Services Consulting before being posted to China. He has now been with Omega Performance for eight years and previously held the role of managing director, Europe.

"With China playing such an important role in the world's economy, and gradual deregulation in its banking sector, it's a very exciting time to be taking up the post of country manager, and I'm very much looking forward to it," he said.

In the first quarter of 2012, Omega Performance drew attention to the twin effects of cuts to banks' reserve requirements and the drive to stimulate domestic consumption, predicting increased opportunities but also increased risk in China's domestic credit market. Since then, Stewart says those predictions have become a reality.

"Most commentators would say that there is now an increased risk of non-performing loans. However, the adequacy of capital in China's banks leaves them well-placed to withstand a rise in such loans. Probably a greater risk lies in further deregulation of interest rates, because this will squeeze the margins of financial institutions and make it harder for smaller institutions to compete."

The lenders that are able to maximize business opportunities and manage risk in this increasingly competitive environment will be the ones that are willing to adapt to new market realities and adjust their lending criteria accordingly, according to Stewart.

"Chinese lenders have been skilled at making loan decisions based on fixed assets, but different skills are required to harness the potential of the SME credit market," he said. "Without those skills, lenders may be unwilling to take what they perceive as risks – but in many cases, it is deficient lending skills, rather than bad risk in borrowers' businesses, that is holding back the market."