A Study Of SME Financing Based On Group Lending

SMEs (Small and medium enterprises) play an important role in supporting the national economy development, but the shortage of internal capital and the hardness of getting external financial resources have been great obstacles in their growth. This fact leads to wide consideration from both the academic researchers and the practitioners all over the world.This paper started from reviewing the theoretic and practical reasons related to SMEs financing problem. Problems of adverse selection and moral hazard, which are generated by information asymmetry, explain theoretically why SMEs are most vulnerable to credit rationing. In practice, the fact that SMEs can provide neither sufficient information about their business operation nor enough collateral, the infeasible character of bank lending, as well as the unfavorable social credit environment combine to make it difficult for domestic SMEs to gather funds.This paper then addressed how Group Lending acted as an efficient way to solve these problems without any requirement of collateral. Based on joint liability, Group Lending can explore the"soft information"between the borrowers and relieve adverse selection by encouraging borrowers with the same risk to form a group though peer selection mechanism in the pre-loan period. In the investment period, the peer monitoring mechanism takes effects, alleviating the ex ante moral hazard. In the loan repayment period, joint liability enables the risk-sharing within the group and uses the"social collateral"mechanism to alleviate ex post moral hazard. All these mechanisms lead to the great success of Group Lending in the rural finance. Next this paper analyzed the characteristics of SMEs in the industrial clusters and found the feasibility of using Group Lending to support SMEs finance in this environment, due to the geographic embeddedness, information and credit advantages.To study the repayment characteristic of Group Lending when applied to SMEs finance, this paper established a Group Lending repayment incentive model by taking the inter-enterprises sanctioning function and the unequal sanctioning relationship parameter into consideration. It is found that the inter-enterprises sanctioning has a positive effect upon the repayment incentive, the greater the inter-enterprises sanction is, the higher repayment ratio Group Lending can get. The unequal sanctioning relationship parameter can also affect repayment ratio. When the sanctioning relationship is equal, Group Lending repayment ratio achieves its highest point. These findings suggest that banks should induce SMEs with strong social ties and equal sanctioning relationship in the industrial cluster to take group loans.