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Optimize Business Models and Improve the Service Efficiency of Financing Guarantee System
2019-10-16
By Zhang Chenghui
Research Report Vol.21 No.5, 2019
I. Status Quo and Problems of Financing Guarantee System in China
1. A brief review of the development of the financing guarantee system
In 1999, the former State Economic and Trade Commission issued the Guiding Opinions on Establishing a Pilot Credit Guarantee System for Small and Medium-sized Enterprises (SMEs), and established the framework of China’s financing guarantee system. In this design, the operators of financing guarantee are the enterprises and institutions subordinate to the government. The financial guarantee system consists of institutions at three levels, i.e., prefecture-level cities, provinces (autonomous regions and municipalities) and the state. Guarantee businesses are based on cities, with re-guarantee institutions set up by provinces (autonomous regions and municipalities) to disperse risks. The state financing guarantee institutions have not been established after the passing of a long time and the development level of re-guarantee institutions in various provinces (autonomous regions and municipalities) has been uneven. However, under the strong impetus of the governments at all levels, credit guarantee institutions in various regions once showed explosive growth, with the number of institutions reaching a peak of 8,590 by 2012, registering an average annual growth rate of 36.6%. The total assets of the financing guarantee industry exceed RMB1 trillion and the credit guarantee in-service balance exceeds RMB2 trillion.
As to the nature of financing guarantee institutions, there are three basic types: policy, commercial and mutual aid. However, due to insufficient government attention, insufficient financial resources and lack of effective internal governance in the mutual aid mode and so on, the financing guarantee system gradually evolved into a pattern dominated by commercial guarantee institutions①. Even state-controlled financing guarantee companies mostly pursue commercial interests.
After the second half of 2011, the risks in the credit guarantee industry erupted, forcing the government to take measures. In March 2010, China’s seven ministries (including the former China Banking Regulatory Commission (CBRC) and the Development and Reform Commission) jointly issued the Interim Measures for the Administration of Financing Guarantee Companies to regulate their business activities. Due to the slowdown of economic growth and the continuous exposure of credit risks, financing guarantee institutions also began shrinking their businesses and making structural adjustments. First, the growth in the number of relevant institutions declined. The number of financing guarantee companies increased from 203 to 8590 from 2000 to 2012, with an average annual growth rate of 36.6%; but it started declining after 2013②, which meant rapid growth of the financing guarantee industry was over. Second, individual financing guarantee agencies expanded in scale. Facing the even more stringent regulatory requirements, small institutions with a registered capital of less than RMB20 million basically withdrew from the market, while the number and proportion of the institutions with a registered capital of more than RMB1 billion increased. Third, against high credit risks, some guarantee agencies voluntarily reduced the scale of loan guarantee business and tilted their business to non-financing guarantee and credit enhancement of financial products with relatively low rates.
After 2015, government support for the financing guarantee system has increased with growing emphasis laid on small and micro enterprises, and innovation and entrepreneurship. The market structure of China’s financing guarantee industry generally presents two categories at four levels: one is the government financing guarantee system, including the government financing guarantee institutions established at the national level (such as the state financing guarantee fund③ and State Agricultural Guarantee Corporation④), provincial, municipal and county financing guarantee institutions. The other is private commercial financing guarantee agencies. Despite the increasing share and strength of state-owned institutions in recent years, the proportion of private commercial financing guarantee institutions is still close to 60%. Due to the generally weak municipal and county-level government financial guarantee institutions, commercial financing guarantee has become the main business entity at the municipal and county levels.
2. Salient problems: commercial financing guarantee institutions lack a sustainable business model
The institutional reason for high risks of commercial financing guarantee in the past was the lack of a sustainable business model.
First, the guaranteed premium rate of 2%-3% failed to guarantee the sustainable operation of financing guarantee companies which bear almost all the credit risks. If the financing guarantee industry could survive thanks to the rapidly growing economy and less risk exposure in the first ten years after the establishment of the financing guarantee system, the original business model will hardly sustain in the new normal as the economic growth rate declines and the compensation rate rises rapidly.
Second, the financing guarantee industry which used to be “scattered, small and disorderly” made commercial banks enjoy an absolute negotiating advantage in cooperation with financing guarantee institutions and hardly share credit risks. Small and medium-sized financing guarantee agencies could not even refuse high-risk projects provided by commercial banks.
Third, there was a lack of effective risk prevention and control measures. For a long time, financing guarantee institutions have been highly similar to banks in both business models and risk control modes, except that the collateral involved covers wider range than that of the banks. Due to the inability to bring incremental value to banks, the financing guarantee business has become the “chicken rib” in many banks.
Fourth, there were deviations in the implementation of supportive policies. In order to improve the financing environment of MSMEs by supporting the financing guarantee industry, a variety of preferential policies have been adopted by governments at all levels. However, the lack of institutional design of these enabling policies has led to fragmentation of policies, and lack of synergy and long-term mechanisms. Moreover, most preferential policies favor government-funded guarantee companies and hardly benefit small and medium-sized private guarantee companies, affecting the fairness of policies.
For these reasons, the return on net assets of the financing guarantee industry was only about 1%, far below the average of 12%-14% in the banking sector and the rate of 6% in non-bank financial institutions, which means their sustainability is questionable. Actually, a number of commercial guarantee agencies would not survive without subsidies from local governments.
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