China Cranks Up Risks as Loans to Small Firms Rise

China Cranks Up Risks as Loans to Small Firms Rise

A government-led campaign in China to boost small business financing by 30 percent has pushed banks to relax lending standards and lower interest rates, even though the sector's track record of defaults are known to be high.

The lending spree - led by large banks in the country, allows small companies to benefit from Beijing’s efforts to prop up the economy after GDP growth slid to a 30-year low. The Industrial and Commercial Bank of China (ICBC) reported a 48 percent jump in outstanding small business loans in the first 11 months of the year, according to a press release.

ICBC, the nation’s largest lender by assets, currently charges small businesses as little as 3.9 percent interest versus the benchmark lending rate of 4.35 percent. 

Unprofitable For Banks

The average interest rates paid on small business loans fell from 7.4 percent to 6.8 percent over the same period. Even if the borrowers do not default, the increase in lending to small companies is often unprofitable as many lenders are pricing small business loans at below the 8 percent average cost of funds for small business loans. 

«The Chinese government is sacrificing banking profits to rescue small firms,» said Ji Shaofeng, a former official at the China Banking and Insurance Regulatory Commission, who was quoted in the «Financial Times». By the end of May, Chinese banks were also reporting a 5.9 percent non-performing loan ratio for small businesses, according to the People’s Bank of China.

Increase in Bad Loans

Concerns are mounting that the the surge in lending to subprime borrowers could lead to an increase in bad loans rather than boost the real economy. Chinese banks lent a record 2 trillion renminbi ($286bn) to small companies with limited access to credit in the first 10 months of this year, the China Banking and Insurance Regulatory Commission announced this month. That is up from Rmb1.7tn in the whole of 2018.

The ICBC Branch in Dezhou, a city in Shandong province in China’s east, disclosed that the subsidy on small business loans is equivalent to a cut of 60 basis points in its lending rate.