Financial regulators are coming up with new methodologies to evaluate the credit profile of small and medium-sized enterprises and improve their access to bank loans, as part of the nation’s ongoing efforts to create a trustworthy society.
China is setting up a national credit score database, managed by the People’s Bank of China — the central bank — to improve information asymmetry of commercial banks and expand loan availability for SMEs with qualified credit scores.
The government is planning to use big data to strengthen the credit assessment capacity, ease funding constraints for local banks and support private and small companies as the economy slows in growth rate. Big data can also be used to evaluate individual citizens’ creditworthiness, said Wan Cunzhi, director-general of the PBOC’s Credit Information System Bureau.
The central bank will augment the national credit information system with databases set up by local governments for SMEs, said Zhu Hexin, vice-governor of the PBOC.
The local information platforms have included more than 2.6 million small-and medium-sized companies so far, through which bank loans worth 11 trillion yuan ($1.59 trillion) have been disbursed to 550,000 entities, according to official data.
Some newly established and non-government credit service agencies can now provide small and micro businesses’ credit information to commercial banks, letting these borrowers access bank loans without pledges or guarantees, according to officials with the central bank.
For example, a credit information platform based in Suzhou, Jiangsu province, is helping SMEs get unsecured bank lending approvals. Credit ratings of these enterprises are based on information registered in the local government databases, such as utility bills.
The platform has also cooperated with 95 financial institutions, through which about 1,900 small and micro companies received loans for the first time. Through that platform, more than 500 billion yuan has been disbursed to more than 8,600 companies, said Zhu from the PBOC.
The PBOC official expressed appreciation for the “Suzhou model”, hinting that the pilot could be copied by more local credit service agencies.
Sun Quan, associate dean of China UnionPay’s Electronic Payment Research Institute, said recently that UnionPay, the world’s biggest card issuer, is working with the Baihang Credit Scoring, China’s first unified private personal credit information service platform, to complement the established government-run credit reporting service, known as the Credit Reference Center under the PBOC.
“We have the world’s largest credit information system, covering 990 million individuals and 259 million enterprises, which is playing a significant role in preventing financial risks and promoting financial resilience,” said Zhu.
“For smaller loan applicants, the major difficulty is the information asymmetry,” he said. “How to reduce default risks of unsecured loans by monitoring the cash flows of companies is also a challenge, because small and micro enterprises are asset-light and short of pledges.”
SMEs without any history of borrowings are usually refused loans by bank officials. The Suzhou pilot program, however, provides a solution wherein private credit agencies can draw upon a pool of nontraditional ratings data from various sources — ranging from tax payments, social security payments to administrative penalties — for assessing small companies’ behavior, according to experts.
With the “alternative data”, other than the loan repayment history, the lenders may also be able to predict whether the small companies will default on a loan in the future, some of them said. But others disagreed as they thought banking and transaction data are still the core information to predict credit scoring rather than records of paying electricity bills.
The PBOC released a statement in April, indicating that more credit information will be included into the national credit information system, in order to accurately assess credit risks and minimize defaults.
The updated credit information system will help improve accuracy of information used by banks in their credit decision-making processes, said Nicholas Zhu, a vice-president and senior banking analyst at Moody’s, a global ratings agency.