Contract Analysis And Design Of SMEs’ Group Lending

As a powerful force for promoting the national economy and social development,small and medium-sized enterprises (SMEs) have occupied an increasingly importantposition. But due to lack of collateral, high operating risk, serious informationasymmetry with banks and lack of effective government support, SMEs, especiallysmall micro enterprises, have always been faced with difficult financing problem.While group lending, which is characterized by fully joint liability, have won awidespread application in the world as well as recognition from the academic, its stiffjoint liability has led to severe strategic default and default contagion，which makesboth of banks and enterprises bear serious losses. That highlights the weakness ofgroup loans.According to the subprime-investment-level credit contracts design theory, thepaper establish credit contract models which aimed at maximizing group membersfinancing value. By comparing the common group loan and individual loan contracts,the models fully explains the weakness of the common group loan contracts indeteriorating SMEs’ financing opportunities and conducing strategic defaults. Thusthe paper presents the group loan contract with partial joint liability from the view ofweakening the joint liability, and proves that the new contract will make it easier forSMEs to finance from banks and increase their financing value as well.In fact, group lending contracts with partial joint liability reflects the credit risktransfer from the enterprises to the banks. And government support make it possibleto transfer the risk to the government and thus support the SMEs financing. Bycomparing different support ways of fiscal funds, it can be found that compared withthe financial discount interest, the paper finds that fiscal guarantee do better inimproving SMEs’ financing opportunities than fiscal interest discount while they bothachieve the same utility increases, and the former can effectively avoid the strategicdefault during an economic downturn. Based on this, this paper proposes to establisha government-leading mutual guarantee fund system. By absorbing capital from theenterprise members, government and other commercial institutions, and independentoperation, mutual guarantee funds provide guarantee for the credit risk of themembers, and thus promote SMEs’ financing opportunities and financing value. This paper therefore supports conclusion as follows. Partial joint liability will notdamage group lending; however it will contribute to reducing the SMEs’ financingcondition. Fiscal guarantee can also be used to bear credit risks, this improvingSMEs’ financing opportunities and financing value. The government should help toestablish a government-leading financing guarantee system, where independentlyoperating mutual guarantee funds stays in the core part, to provide financial guaranteefor group members, which can operate independently and make the institutionalismoriented mutual guarantee fund as the core.