Letting city commercial and rural banks increase lending to small and medium-sized enterprises (SMEs) might not be an ideal long-term model for China, because they lack the funding muscle and risk management ability of the larger lenders, KPMG has warned.
In KPMG's annual banking survey, analysts found large commercial banks had long been reluctant to lend to SMEs because they were more comfortable lending to state-owned enterprises (SOEs). However, this mindset must change, they said.
'The loan books of big banks have been occupied by SOEs that have generated decent returns, making them complacent with their positions,' said Jason Bedford, manager of financial consulting services at KPMG.
But given SMEs' size and growth, having a strong lending business with SMEs would be a core competitive advantage for banks in the future, he said.
SMEs account for 60 per cent of China's industrial output and create 80 per cent of the country's jobs, according to Xinhua. But SMEs have been cash strapped and anecdotal reports suggest that they have been paying annualised rates of 15 per cent to 35 per cent for loans through non-banking channels, said Bedford.
In order for larger banks to take a more active role lending to SMEs, loan pricing needed to reflect risk, which would be higher than the typical 2 percentage points to 3 percentage points above the benchmark rate at which banks price SME lending, said KPMG.
In June, the China Banking Regulatory Commission said lower risk weighting would be applied when calculating the capital-adequacy ratio for loans of less than five million yuan (HK$6.1 million) to individual SMEs. Such loans will also not count towards the calculations of banks' loan-to-deposit ratios that are capped at 75 per cent.