The Research On Loan Pricing For SMEs Based On RAROC

Small and Medium-sized enterprises (SMEs) are now playing an increasingly important role in many dimensions in terms of economy, employment, and innovation in the course of economic development. However, the lack of developing fund and the inadequacy of financing cause difficulties at the start and the retard of development of SMEs, and also have been bringing about the waste of social resources. On the other hand, commercial banks which have a large amount of capital are unwilling to provide loans to SMEs. Therefore, how to stimulate banks to provide loans to SMEs becomes the current social focus, which not only can satisfy the capital demand of SMEs, but also enable banks to make a profit on working of the idle capital.To support SMEs, the government has issued a series of policies to activate financial institutions to provide loans to SMEs. In 2005 the State Council issued "Guidelines for Encouraging, Supporting and Guiding the Development of the Non-Public Sector of the Economy, Including Self-Employed Workers and Private Companies" to push the banks to consider lowering the financing requirements towards SMEs. However, in the loan pricing procedure for SMEs, the banks follow the routine method which is mainly aimed at the large-and middle- scale enterprises. So part of requirements are too restricted to SMEs, which often results in too high loan interest rate and decreases SMEs' enthusiasm of financing from banks. Consequently, the banks are in bad need of a pricing scheme on loaning towards SMEs.In view of this, this thesis chooses an appropriate loan pricing method for SMEs—RAROC (Risk Adjusted Return on Capital). Through the analysis on loan pricing towards listed SMEs, the thesis proves that RAROC well fits the loan pricing towards SMEs. In this thesis, firstly, through comparison of various loan pricing methods, RAROC is selected out as the best method for SMEs and its principle is introduced. Secondly, as the risk-adjusted function is the core of RAROC, so the base of RAROC-Credit Ranking is studied. SMEs are chosen as the subjects of credit ranking. According to the status quo and the former ranking standards of SMEs, primary selection of indexes is carried out; then, through the principle components analysis, the result of primary selection is sifted, and the weight is fixed by the variance contribution ratio of common factors, hence the comprehensive factor scores for SMEs, which are used as the subjects of cluster analysis to rank SMEs in five levels. After that, transition matrix of credit ranking for SMEs is constructed, which finally links the credit risk level, the comprehensive factor score, and the probability of default together. Finally, RAROC is applied in loan pricing for SMEs, and to be more operative, cases are used in this thesis to clearly demonstrate the whole pricing process of loans towards SMEs.