Small Loan Company Loan Risk Management Research

Based on the reform of the rural financial system and micro-credit development, the Chinese government has been exploring ways to establish small loan companies that are in line with our current national conditions. In doing so, the Chinese government hopes to enable them to become the veins of the finance and transfer funds to micro economic entities which are facing financial difficulties. At the same time, small loan companies are expected to play a major role in expanding employment, standardizing and guiding flowing direction of private funds, narrowing the income inequality between the rural and urban regions, and contributing to social and economic development. In October2005, People’s Bank of China launched small loan companies in five provinces, including regions. After that, small loan companies have prospered in different parts of China and many of them have become an important additional force of the financial services. By the end of2012, the number of small loan companies has reached6080, up by42.78%while the balance of loans has reached RMB592.138billion, an increase of51.24%. However, though the small loan companies and their businesses have grown substantially, risks are inherent in issuing loans. Therefore, in order to achieve sustainable development, the small loan companies must do a good work of guarding against risks.The present paper centers on the risk prevention of small loan companies by analyzing the status quo of the risk prevention as well as the present problems. The priority is given to elaborate on the applicability of risk prevention technics practiced by typical group lending to the small loan companies in China.Based on this analysis as well as the analysis of the characteristics and reasons of the loan risks facing these companies, the paper comes to find that there is a high risk of issuing loans and reasons behind are very complex. Therefore, it is imperative for small loan companies to prevent such risks. After on-site investigation and the summarization of experience, the paper finds that though there are reasonableness in the risk prevention procedures of small loan companies, there are some prominent problems such as the latent risks due to insufficient prior investigation, the strong subjectivity of risk assessment in the loans processing stage, the incomplete monitoring and examination mechanism after the loans are issued, the incomplete or falsified financial data as well as the personnel risks.The most important restructuring method for these small loan companies is to encourage them to innovate technics to guard against risks. At present, the joint guarantee mechanism is the most typical way to prevent such risks and can be considered as one of the most important methods in the field of micro-credit. Therefore, it is of practical significance to study its applicability to the small loan companies in China.The paper will elaborate on the joint guarantee mechanism risk prevention technics from aspect of concrete concept, the foreign and domestic researches in the field, the theoretical analysis as well as the game analysis. Such work can pave the way for the latter analysis of its applicability. After that, the paper concentrates on analyzing the joint guarantee mechanism risk prevention technics in helping small loan companies in China. The analysis shows that these technics can make positive achievement in forming the customer automatic selecting mechanism, lowering the small loan risks, alleviating the small loan clients difficult security issues, expanding the business quality, slashing the management costs and improving social credit environment.However, on-site investigation finds that the problems such as the difficulty in establishing lending group, the light social credit punishment, the collaborative loan issuing traps between the group members, the ineffectiveness of joint guarantee mechanism because of "monitoring cost", the complex legal procedures as well as the preference of the issued funds have limited the applicability of joint guarantee mechanism risk prevention technics to the small loan companies in China. Therefore, it is necessary to modify these problems in various aspects so that the applicability of joint guarantee mechanism risk prevention technics to the small loan companies in China can be enlarged and the risk prevention ability of these companies can be improved.Currently, the domestic academic studies on joint guarantee mechanism risk prevention have focused on the joint guarantee loan in rural credit cooperatives. Because the basic information about the small loan companies are hard to collect and the loan issuance decisions are mainly determined by soft information, the studies on the applicability of joint guarantee mechanism risk prevention technics to the small loan companies is rather sporadic. Therefore, the major feature of the paper is to analyze the applicability of joint guarantee mechanism risk prevention technics to the small loan companies in China.