Study On Chinese City Commercial Banks’ Credit On Small Enterprises Under Information Asymmetric

Small Enterprises (SE) have experienced fast growth since the enforcement of Open and Reform policies in1980s. Such enterprises have playing more important roles in booming economies and civil industrialization, absorbing workforce, and mitigating economic divide between urban and rural areas. However, for a number of reasons, they are still facing serious difficulties in financing, which presents big problems for their further development. Current studies mostly focus on medium and small enterprises whose financing problems are not that serious, but few are concerning about small ones. As small and medium enterprises have different financing needs, it is of great significance to differentiate small ones from medium ones in carrying out such studies. Only when we have a good understanding of financing situations for both small and medium enterprises, can we make good policies in regulating enterprise financing activities.The information asymmetry developed in1970s is a good research framework to study the financing problems for small enterprises. Small enterprise will make a comparison of the available measures while financing, while banks will be cautious in granting loans to such enterprises in order to mitigate the problems of information asymmetry and moral hazards.We firstly analyzed the supply and demand of loans in the financing market for small enterprises based on the economic theory, arguing that there is a huge gap for the fulfillment of financing demands of small enterprises, and banks are the most important suppliers of loans. Then we analyzed the reasons for the difficulties of getting loans from banks through the perspectives of information asymmetry. We found that soft information is playing a significant role in determining the credits of small enterprises. As such information is hard to measure and expensive to obtain, the banks are reluctant to collect such information for judgment and therefore have few motivations to lend to such enterprises. Secondly, we empirically examined the existence of financing gaps of small enterprise and the existence of discrimination against them by state-own banks in China. We proved that the best way to get loans for small enterprises is from city and commercial banks who are paying special attentions to collecting soft information of small enterprises. Then through comparison studies, we found that the major factors that causing the financing difficulties of small enterprises are the information asymmetries between enterprises and banks. To overcome such information asymmetry, most loans are judged and granted through personal relationships. As a result, from the technical aspect, we concluded that the major reasons for the financing difficulties of small enterprises are three folds:first, the discriminations against small enterprise by financial institutions originated from information asymmetry; second, from the organizational aspect, the structures of financial institutions may influence the process procedures of information for the judgment of creditworthiness of small enterprises, which determines that financial institutions would take most appropriate ways to making lending decisions; and finally, from the macro economic environmental aspect, the entrance barriers may also have negative impacts of supplies of loans to small enterprises.Finally, we gave directions to solve the problem of financing difficulties of small enterprise through a case study of from Baoshang bank. Through cross validation of credit information of small enterprises before loans, the Baoshang bank can effectively solve the problem of information asymmetry and overcome the repayment uncertainties originated from incompleteness of financial reports of such enterprises. We then gave recommendations to enhancing financing environments for small enterprises from the perspectives of small enterprises and macro economic environments.