The Study Of The Tripartite Mechanism Of SMEs’ And Banks’ Credit Market

With the development of the market economy, SMEs play a much more important role in the economic construction process than before. However, the financing problem severely limits the development of SMEs. As a result, a large number of SMEs closed down halfway. Therefore, the financing problem of SMEs attracts more and more attention to the government and the scholars. This paper is written to find out a way to solve this problem.First, we should have a clear understanding about the concept and characteristics of SMEs. The so-called SMEs (small and medium enterprises) are certain kinds of enterprises which have fewer assets, less staff and less business than the large-scale enterprises in the same industry. In our country, the standard for SMEs is based on "Provisional Regulations on Standards for SMEs" which was published in 2003. In this regulation, there are different standards for seven major industries. In our country, the majority of SMEs is private and most of them concentrate in labor-intensive industry sectors. As for the geographical distribution, the development of SMEs in eastern region is significantly faster than the western region. Currently, the number of SMEs reached 99% of the number of all enterprises, and created 60% of GDP and 80% of employment opportunities. SMEs make a great contribution to the entire economy.There are several financing ways for SMEs, but the most frequently used way is bank loans. The reason for that is not only bank loan has its own advantages, but also the financing environment has hindered the development of the alternative sources of financing. However, it’s really hard for SMEs to get bank loans, because the banks are worried about the high risk carried by SMEs. So, the banks set a high threshold for SMEs, like high interest rate, the limit for loan amount and the discrimination of industries. But among all those barriers, the strictest requirement is asking SMEs to provide collateral. This requirement keeps a lot of SMEs which have good market prospects and high investment return out of the market.The reason for all the actions the banks take is that the banks have doubts about SMEs’ability and will to repay the loans. The essence of this problem is credit risk. Credit risk is caused by one party’s default, and this default may make another party suffer a great loss. There are three major reasons for how credit risk is created---namely, the property rights problem, information asymmetry and the instable long-term expectation. In the particular case of SMEs’and banks’credit market, credit risk is primarily attributable to information asymmetry and the instable long-term expectation. In the perspective of information asymmetry, the banks can’t get enough information about the credit level of SMEs. The banks can’t use interest rate to distinguish low risk SMEs from high risk SMEs, so it will cause adverse selection. And they can’t effectively limit the way SMEs use the loan either, so that there will be moral hazard. In the perspective of instable long-term expectation, the owner of SMEs will take more short-term motivated actions because they can’t expect how long their life would last and how the policy would change. To sum up, the level of credit risk of SMEs is much higher than the large-scale enterprises.To cope with this situation, the banks use credit rationing. In short, credit rationing asks SMEs to provide collateral. The equilibrium under credit rationing is partial equilibrium on the side of the banks. It doesn’t meet the need to maximize social welfare and get Pareto optimality. So we can conclude that, just relying on the banks and SMEs can’t achieve the goal of general equilibrium, a tripartite mechanism should be introduced in SMEs’and banks’credit market. The tripartite mechanism is aimed to reduce the credit risk of SMEs and the degree of information asymmetry, and also to solve the partial equilibrium the credit rationing brings in order to achieve the general market equilibrium.At present, the guarantee agencies play the role of the third party. They get much support from the government, and make great achievement. However, the guarantee agencies have their own drawbacks, such as too much government involvement, weak voice in the market, lack of capital, poor risk diversification mechanism and so on. The most serious problem is that guarantee agencies still ask SMEs to provide collateral. So the guarantee agencies can’t fully play the role of an efficient third party. As a result, we need a new tripartite mechanism to play a full role when SMEs are lack of collateral. This tripartite mechanism is the insurance mechanism.Insurance mechanism has many advantages. Insurance companies are the institutions which directly face the risk and operate the risk. So they have plenty of ways to deal with the risk. First, insurance mechanism can use risk identification technology to reduce information asymmetry and banks’ information cost. Second, insurance mechanism can diversify risk afterward. From an equilibrium perspective, insurance mechanism can make SMEs’marginal cost of credit consistent with the large-scale enterprises, so the banks’credit support could return to the marginal productivity of the enterprise. Also insurance mechanism can reduce the overall risk of lending to SMEs, and make partial equilibrium moving forward the general equilibrium through this external influence. Through the economic analysis, it is very clear that the insurance mechanism can solve the difficult problem of bank loans for SMEs. It will make a positive effect to the SMEs, banks and also the insurance companies. Besides, it will also help to foster a sophisticated credit market. In addition, the insurance mechanism can solve all the deficiencies the guarantee mechanism faces. So, insurance mechanism can be seen as a very effective party to the SMEs’ and banks’ credit market.For the need to deal with credit risk, we raise two forms of insurance to solve the problem, the credit insurance and the guarantee insurance. To find a suitable way for the insurance mechanism to run in China, we should learn some experience from some developed countries first. Japan and the United States are the first club in the world to run such business. They have abundant experience. We could learn from them and work out a way for ourselves. In Japan, the government makes a great effort. They built two major institutions------SME Credit Guarantee Association and JASMEC (that is, the original "JASME") to solve the financing problems of SMEs. The two institutions are primarily responsible for solving the problem that SMEs are hard to get bank loans. Both the banks and the SMEs can apply to the SME Credit Guarantee Association to get a guarantee for the SMEs. After examination, SME Credit Guarantee Association will automatically be insured by JASMEC. SME Credit Guarantee Association has to pay 40% of the guarantee fee to JASMEC as the premium. When SMEs can’t repay the loans, the SME Credit Guarantee Association should to replace SMEs to repay the debt. Meanwhile JASMEC should pay the equivalent amount of 70% of the actual compensation to the SME Credit Guarantee Association. If SME Credit Guarantee Association can recover the debt, it should return 70% of the recovery to the JASMEC. In fact, JASMEC take the risk of SMEs. In the United States, almost every insurance company has conducted the business. But the U.S. sets clear limits for the insurance companies who want to operate this business. All the companies in this field are required to meet certain requirements in order to get a separate business license.90 percent of U.S. commercial banks participated in the loan credit insurance. We could see its popularity.The development of SME loan insurance in our country started from 2007. The product is mainly the guarantee product. Considering the situation of our country, we make provision suggestions to both guarantee insurance and credit insurance. The provisions are mainly about the insurance amount, insurance liability and exclusions, premiums, the insured, deductible and so on. The suggestions are based on insurance companies’risk management needs and the actual needs of SMEs and banks. After that, we give suggestions to insurance companies’risk control system. The insurance companies should keep a close attention on every aspect of operation. Then, we analyze the external obstacles which may influence the business. And based on that, we make policy advice for the government, like building the related legislation, or giving economic support, or setting professional institutions. At last, we give some new ideas to solve the problem of lending from banks. For instance, insurance companies can provide the property insurance or the accident insurance of the owner, or directly provide the loans.There are a lot of academic discussions about SMEs’financing problem. The innovation of this paper is that we specifically discuss the financing channel of lending from the banks. In this paper, we analyze the internal reason about why lending from banks is so hard for SMEs. We introduce credit rationing theory into this field. And through analyzing the nature of credit rationing theory, we propose to introduce a third party to SMEs’and banks’credit market to solve the financing problem. After a comprehensive analysis about the existing tripartite mechanism, we find it is necessary to introduce a new tripartite mechanism - the insurance mechanism. In this paper, it’s noted that we have clearly distinguish the credit insurance and guarantee insurance. And we make separated feasibility analysis and policy terms for them.