Institutional Environment And The Procyclicality Of SME Loans

For a long time,small and medium-sized enterprises(SMEs)have been facing the problem of difficulty in obtaining financing.In China,over 90% of enterprises are SMEs,which play a crucial role in the country’s economic development.With the goal of common prosperity,the development of SMEs has attracted increasing attention.However,due to the combined effects of internal and external factors,there exists an extremely unbalanced situation between the significant economic role of SMEs and their access to credit resources.To support SMEs,the state has implemented a series of financing support and tax reduction policies.However,the problem of difficulty and high cost of financing for SMEs still persists.As SMEs generally find it more difficult to obtain financing from financial markets,bank loans are an important external source of financing for them.But because SMEs often have less transparent information,obtaining loans from banks can be challenging.Furthermore,due to the pro-cyclicality of bank credit behavior,more enterprises can obtain loans during economic prosperity,while the size of credit shrinks significantly during economic downturns,making it even harder for SMEs,which are already struggling with tight funding and narrow financing channels,to obtain approval for loans.Therefore,in order to alleviate the problem of difficult financing for SMEs,it is important not only to focus on whether companies receive more bank loans,but also to consider whether the pro-cyclical nature of their financing is alleviated based on the premise of economic laws.Therefore,this article focuses on small and medium-sized enterprises and analyzes the impact of institutional environment factors,including the relationship between government and market,financial marketization,the development of market intermediaries,and the legal environment on the pro-cyclicality of small and medium-sized enterprise loans.The research findings show that bank loans to SMEs in China exhibit overall pro-cyclicality.The level of institutional environment is positively correlated with bank loans to SMEs,and a higher level of institutional environment can alleviate the pro-cyclicality of SMEs’ access to bank loans.Furthermore,heterogeneity analysis shows that the impact of institutional environment on loans to SMEs varies for enterprises with different ownership,industries,and regions.The impact of institutional environment on bank loans to private SMEs is more significant than that of state-owned SMEs.The impact of institutional environment on loans to SMEs in the manufacturing,information transmission software,and information technology service industries is more significant than that of the agriculture,forestry,animal husbandry,and fishery industries,as well as water conservancy,environmental protection,and public facilities management industries.A better institutional environment can significantly increase bank loans to SMEs in the eastern region and effectively alleviate the pro-cyclicality of loans,while the impact of institutional environment on bank loans to SMEs in the central and western regions is not significant.Through a series of mechanism analyses,the differences in regional results mainly stem from the differences in the level of institutional environment among regions.As an important external financing source for SMEs,banks are prone to market failure in lending to SMEs due to severe information asymmetry and unattractive risk-return characteristics.The experience of developed countries in Europe and America has repeatedly proven that only by continuously creating a sound institutional environment-good government governance,a well-developed financial support system and a sound legal framework-can the financing problems of SMEs be better solved.Compared with existing literature,this paper not only examines whether the institutional environment has a significant impact on the number of bank loans to SMEs,but also further analyzes whether the institutional environment will significantly affect the pro-cyclicality of SMEs’ access to bank loans and its heterogeneity.Finally,based on the research conclusions,policy suggestions are proposed from three aspects: government,financial market,and legal environment,exploring how to create a good institutional environment for the development of SMEs and seeking further improvement of the system to promote SME financing.