A New Perspective On Due Diligence Of Credit Guarantee

Credit guarantee industry in China started in the1990’s. Since then this industry has played a more and more important role in Chinese economy, along with the continuous economic reform and deepening process of marketization of China. It is well known that credit guarantee is a high-risk industry, standard management and regulation is required to avoid double adverse selection and double moral hazard, as well as to reduce the asymmetric information effects. Due diligence investigation is the cornerstone of risk management, and it’s the most important step to actively prevent from potential risks. By thoroughly identifying the potential risk factors and analyzing their causes, we can set up the basis of risk assessment and risk control, and then formulate the best risk management scheme.At present, despite many researches on the aspect of guarantee system, we still lack a theoretical and systematic study on the operational level due diligence practice.In this work, we study the relationship among asymmetric information, risk, credit guarantee and due diligence from a systematic perspective, and then build a new due diligence analysis framework.Our results are based on a concrete analysis of SMEs (small and medium-sized enterprises), taking into account their strategy, their size and macro-economic environment. We carefully investigate the purpose of due diligence, focus on both the repayment ability and the willingness to repayment, and then conclude our results by using tools such as Harvard analytical framework and expert judgment method. After that, combining with several cases of credit guarantee, we make a further case analysis and elaborate on the contents of due diligence.The framework of due diligence here provides a new method and concept, it may help the guarantee institutions to correctly judge the SMEs credit capacity, such that to improve their guarantee quality and serve better SMEs.