How to Recover SME Financing: CBRC 10 Banking Rules (Part I)

China SME (Small-and-Medium-sized Enterprise) financing has been a real hot topic recently. Many Chinese small-and-medium-sized enterprises have been attacked by foreign investors and their stock prices fell sharply. It seems the market does not fully aware that the CBRC (China Banking Regulatory Commission) have already noted to recover this financing problem earlier in 2011 and published a powerful "CBRC 10 Rules" as follow:

"CBRC 10 Rules" (document [2011] No. 59) Initial Release on 25 May 2011

(1) To direct Chinese commercial banks to support small-and-medium-sized enterprises that conform with national environmental, industrial and employment policies, and have repayment willingness with capability (business sustainability) to repay.

(2) To direct commercial banks to implement six reform mechanisms:

(i) Interest rate and risk pricing mechanisms;
(ii) Isolated auditing mechanism;
(iii) Effective loan approval mechanism;
(iv) Incentive and restraint mechanisms;
(v) Professional personnel training mechanism;
(vi) Information notification (for breach of contracts) mechanism.

To direct commercial banks to follow four isolative principles to further reinforce resource allocation to meet loan demands of eligible small-and-medium-sized enterprises. These four principles are to have:

(a) Isolative operation for SME-specific credit lending plan;
(b) Isolative financial and human resources allocation;
(c) Isolative customer identification and credit rating review;
(d) Isolative account auditing.

Strive to achieve growth rate of SME credit loans should be no less than the average growth rate of total credit loans.

(3) To encourage commercial banks to study actively on a pilot basis for innovative SME lending models, products and services. Reinforce research and development (R&D) of new service practices, financing models, credit products as well as collateral methods based on the special financing needs of small-and-medium-sized enterprises.

(4) To prioritize and improve the review efficiency and administrative approval process of market access applications for SME financial services. To actively support commercial banks, under the condition of satisfying prudential banking supervision requirements, to open more branches if they can achieve: (a) growth rate of their SME credit loans has not been less than the average growth rate of their total credit loans for two consecutive years; (b) good control in credit risk management.

(5) To ensure commercial banks to reinforce SME-specific business management. For those already established SME-specific operations, their head office shall also set up a separate management department correspondingly. To encourage SME-specific businesses to expand their service network. To support commercial banks to open more SME-specific service network if their remaining balance (or quota) available for SME credit loans have reached a certain percentage of their total credit loans.

(6) To encourage commercial banks to set up new professional and special branches or modify existing branches to run SME-specific financing services.

(7) To preferably support commercial banks, under the condition of satisfying prudential banking supervision requirements, to issue financial bonds for their SME-specific lending businesses if their remaining balance (or quota) available for SME credit loans have reached a certain percentage of their total credit loans. To monitor strictly the flow of funds raised by such financial bonds.

(8) To apply the following differentiated regulatory assessment (subject to approval by the regulatory authorities) for commercial banks which have effective evaluation on cost of risks, adequate capitals and loan provisions, as well as good financial services to small-and-medium-sized enterprises:

(8a) Allow commercial banks, which apply IRB (Internal Ratings-Based approach under the New Basel Capital Accord) as a function for calculating its capital adequacy ratio, to regard SME loans not over RMB 5 million as routine retail loans. Also allow commercial banks, which does not apply IRB (Internal Ratings-Based) approach as a function for calculating its capital adequacy ratio, to regard SME loans not over RMB 5 million as routine retail loans if they satisfy certain standard requirements. The related risk weighting should be implemented according to the "Capital Adequacy Ratio Management Approach For Commercial Banks".

(8b) Allow commercial banks to exclude financial bonds that they issued for SME loans not over RMB 5 million when calculating its loan-to-deposit (LTD) ratio.

(9) To apply differentiated regulatory assessment for commercial banks so that they can properly tolerate higher SME non-performing loan (NPL) ratio based on the actual situation regarding the costs, risks and write-offs of their loans to small-and-medium-sized enterprises.

(10) To aggressively push for broadening financing channels and diversifying financing services to small-and-medium-sized enterprises. To coordinate with local governments and corresponding departments to further improve and implement the related tax and fiscal policy.

This initial release of "CBRC 10 Rules", however, was not detailed enough to address the SME financing issue effectively, and hence more details about implementation of "CBRC 10 Rules" was then published in late 2011. In our next article, we will go though all these details with you to reveal how powerful these rules can help recovering the financing problem of small-and-medium-sized enterprises in China.


Next article: CBRC 10 Rules (Part II).