The prudence guideline on commercial banks' lending to small enterprises recently issued by the China Banking Regulatory Commission (CBRC) will surely give them such a shot in arm. (Related article: Regulator offers loan plan for small firms )

By streamlining approval procedures and increasing flexibility to facilitate loan grants, the banking authorities are creating a favourable regulatory environment for domestic banks to better serve small enterprises.

Given the considerable growth potential of small businesses and the competitive pressure Chinese banks will soon face as the domestic banking sector is fully opened up to foreign rivals, it is believed that lending to small enterprises could be a win-win for both the lender and the borrower.

On the one hand, small enterprises have strong implications for employment and economic growth in China. Hence, giving them more credit access and facilitating their long-term development are essential for building a harmonious society and a balanced economy.

On the other hand, foreign bank giants are more competent and interested in wooing high-end clients with advanced management and services. To withstand competition from them, Chinese banks have to reshape their business strategies in line with their advantage of widespread distribution of branches, which enables them to serve numerous small enterprises closely.

While micro finance generally involves more risks, banks' innovative systems for credit evaluation, risk control and client management can make such lending a source of fat profits.

The central government was keenly aware of the importance of boosting small business development to sustain the country's long-term economic growth. Last year, the State Council issued instructions to promote financial services to the private sector, where most small businesses concentrate. The CBRC later also set out mechanisms guiding banks to provide small enterprises with more access to credit and better financial services.

Statistics indicate that by the end of June, the outstanding balance of loans made by major banks to small enterprises reached 2.64 trillion yuan (US$334 billion), rising by 141.2 billion yuan (US$17.8 billion) from the year's beginning.

Thanks to the promotion of micro financing services, small businesses have obtained enhanced financial support from the banks. According to preliminary statistics, 73.79 per cent of the credit needs of small enterprises in Beijing were satisfied as of end-2005, up 6.82 percentage points year-on-year.

The new prudence guideline has improved mechanisms and the supervisory framework for lending to small enterprises. Domestic banks should take the chance to work out more creative solutions and tailor financing schemes to serve small businesses.

(China Daily 10/10/2006 page4)

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