A Study On Risk Aversion Mechanism Of SMEs’ Group Lending

The model of Group lending for SMEs alleviates the plight of Information asymmetry between banks and enterprises, which also transforms the dynamic game of incomplete information between banks and enterprises into the repayment game of banks and enterprises and the Group lending team members itself, in addition its multi-levels joint liability-sharing system effectively passed on the credit risk of commercial banks. The Perspective of research for group lending loans are more concentrated in the repayment game between the members of the group lending, through the interpretation of the relevant literature,we find although it has achieved a high depth in research but the extent it involves is inevitably limited. This article is based on existing research to combine process risks of commercial banks’group lending loan business and the risks which have a high incidence in commercial banks’business practice, meanwhile in order to facilitate the analysis, the research process is subdivided into two dimensions of the pre-admission and post-admission, so we can take targeted risk prevention measures to handle relevant risks.To prevent and control the risks for pre-admission, we can achieve this mainly from the following aspects:(1) social capital acts as a "soft constraint" which used to be regarded as the "opportunity cost" of the borrowers’short-sighted behavior, and the role it plays mainly depends on the coverage conditions of the social network as well as the strength of interdependence between the members of the group. so if commercial banks want to give full play to the effectiveness of joint and several liability to avoid accumulation of the risk factors from the prophase, qualification screening should be strictly enforced.(2) SMEs’group lending was created as a financial innovation to solve the financing difficulties of SMEs, although it possesses the superiorities of mechanism in self-screening and improving commercial banks’ability to obtain information, but the loan-oriented customers are mainly from the same industry or related businesses in an industrial chain,the excessive dependence of the member companies will lead to commercial banks’credit investments are too concentrated, in the event of debt-servicing difficulties, the "herding" feature of systemic risk is easily induced. Portfolio risk management philosophy provides us with a feasible solution, on the one hand commercial banks should provide external incentives for the active dispersion of the group members, on the other hand it requires commercial banks to estimate incremental marginal contribution of a group which comes from a cluster industry to the cumulative risks from the institutional level to determine its access to admittance.(3) Credit risk mitigation tool is the most direct means for commercial banks to offset the risk exposure, in order to minimize the exposure, commercial banks can increase the amount of Security deposit and require the group to invite a security company to join or to provide counter-guarantees directly to ensure the risks being in control.(4) Due to the endogenous economies of scale of group loan system so that we can achieve a higher loan recoveries by means of appropriately increasing the number of group members, but the expansion of the scale must be limited we can only obtain a conditional optimality in a specific constraint conditions. In the set of group members’size Grameen Bank requirements the number of group members be5, thus the definition of group size must be linked with the commercial bank’s business strategy, not blind expansion. The above-mentioned access standards are essential references for commercial banks to guard against credit risk and it also has an important theoretical significance.To control the credit risk of post-admission,we can accomplish this through following several ways:(1) changing the use of the loans to invest in high-risk industries is the high incidence of typical commercial banks’credit risk and group lending is no exception, so commercial banks should strengthen the supervision of credit funds and improve the terms of payment;(2) The commercial bank’s credit risk includes not only the risk of direct default from the counterpart, also includes the risk of potential loss to commercial banks owing to the deterioration of its credit rating, this requires us not only to take the necessary preservation measures when the loan is due, but also to take a dynamic monitoring of credit risk’Point-in-time change, only by us can we take appropriate mitigation measures to avoid further expansion of the area of loss and Credit Metrics model offers us a kind of possibility to improve the accuracy of credit risks’measurement.Therefore commercial Banks should improve their own credit rating system and focus on data mining and the research and development of the model;(3) Strategic default is usually caused when the passive default of a member happens,the other members will take a dominant strategy after weighing their own payoff function, but also is an adverse outcome of the group lending system which is too rigid. In order to achieve a "win-win" situation between banks and enterprises, commercial banks should attempt to improve the borrower’s willingness to repay Through the adjustment of the contract or external incentives of joint gain.(4) The "herd behavior" caused by The flow of information and reputation effects is a common phenomenon in China’s securities market and credit markets, the emergence of the behavior will not only lead to excessive concentration of risk, but also distort price signals which can lower the locative efficiency of financial resources. For group lending, Multi- party loans of commercial banks lead credit resources’investment to be too concentrated, which will enlarge the risk factor of individual bank’s incremental credit. Safety, profitability and security which act as the basic principles of commercial banks’operation, once the lending group’s operating crisis occurred then the behaviors of collective pumping credit from commercial banks will take place and the security and liquidity of commercial bank credit assets will suffer a great impact. in order to effectively inhibit the collective irrational behaviors of commercial banks, this article through the use of Bayesian posterior rule to illustrate the non-rational practice, and argues that strengthening the information exchange mechanism between the industry and taking necessary repayment relief mechanism should be a dominant select for commercial banks to deal with the risk. Finally, a summary of the conclusions of this study and inadequacies is given and future research directions of group lending are introduced. The purpose of this paper is through the flexible design of the group lending’s intrinsic mechanism to maximize the effects in solving the problem of SMEs’ financing.