The Myths and Realities

Under the context of tighten- ing macro-control polices， the financial problems of small and medium sized enterprises (SMEs) rise again. Many SMEs resorted to the informal financial resources， and some of the SMEs can’t shoulder the huge financing pressure with the weakening economic activity and many bosses run out in Wenzhou etc. SMEs have the increasingly important role in ensuring the sustainable， healthy and stable development. In order to get closer views of financial problems of SMEs in Hainan， we made a survey of informal financial Resources. Here are some of the results of the survey.

Background of the survey

Taking into account the economy of the cities and counties and private finance of the level of activity， we selected 100 companies as the sample of survey， involving 18 cities and counties across the Hainan province. Among these companies， 39 companies are industrial ones， 61 non-industrial companies; 10 large companies， 20 medium-sized and small companies; 22 state-owned and state holding enterprises， 21 publicoffered- companies.

The main result of the survey

Participation rate of informal financial resources increased. Compared with the survey of five months， financial participation rate rose 11 percentage points to 26%， 26 companies have resorted to informal financial Resources. Compared with the financial participation rate of 59% in Wenzhou， the participation rate in Hainan is low but in line with the realities of private enterprises.

The SMEs are main bodies for informal financial resources. As for the scale of enterprises， large enterprises have not resorted for informal financial Resources. Among the 26 companies resorted for informal financial Resources， four are medium-sized and 22 small enterprises. As for the ownership of enterprises， the state-owned and state holding enterprises have not resorted for informal financial Resources. 24 enter- prises are joint stock， co-occurrence of foreign investment and other private enterprises. As for the sectors of enterprise， six are industrial enterprises， occupied 15.38%， 20 non-industrial enterprises， 11 agriculture ones.

The bank loan is still the preferred channel for private enterprises， followed by informal financial resources. Whether large enterprises or SEMs， bank loans is still the preferred channel and 82.41% of the surveyed enterprises resort to bank loans in financial choice. Other financial options such as issuing stocks， bonds， bills and increase collections and payables， etc. Due to capital markets are underdeveloped or insufficient to support the huge financial demand in Hainan ， bank loan is still the preferred channel for private enterprises.

Informal financial intermediaries are main channels for private enterprises. Eight out of 26 enterprises got finance through informal financial intermediaries， 7 through inner financing， 6 by other financial companies， accounting for 23.08%. By 2 individuals(not including shareholders， employees of the unit) and 3 private financial intermediaries， accounting for 7.69% and 11.54%， respectively. Many private enterprises resort to informal financial resource for its low convenience.

The period of informal finance are mainly short-term. 15.38% of the surveyed informal finance are within one month period， 38.46% in the period 1-6 months (including 6 months)， 26.92% in the period of 6-12 months (with 12 months). As for the interest rate. The shorter of the period， the higher interest rates. The interest rate range of private finance is from 12.38% to 34.57%. The interest rate is 8.13 percentage points higher than the one-year benchmark lending rate. Informal finance structure of interest rates and lending rates differ in period， which is the shorter the period of higher interest rates for companies are anxious to take short-term lending urgently for higher cost.

The overall risk of informal financing under control. 76.44% of the surveyed companies have full schedule to repay borrowed money， 14.90% companies has been postponed， but mostly to repay the borrowed money. Convertry to the common sense， most of surveyed companies will repay the borrowed money as schedule. There are two reasons: First， lenders’ increasing ability of risk identification prevented borrower defaults; Second， borrowers turn to informal financing as last resort. Companies which have not repaid as due will be extremely difficult to get new refinancing resources.

The new trend of informal financial problems

Bank funds is the most important source of informal financing. With the macro-contral ecnomic policies， bank deposits decline rapid this year. New deposits only increased 27.30 billion yuan， down 55.125 billion yuan from 82.427 billion yuan year ago. And savings deposits down 13.76 billion yuan. The main reason for bank deposits decline is the the diversion of financial products. And most of the deposits leaked into private lending market. According to the survey， funds flow from personal to the guarantee company rose 35% this year. The business of the “underground banks” expanded heavely. In addition， small loan companies are increasing the business through relending from China Development Bank. The bank deposits are the main support of rapid growth of private financial funding.

With rising interest rates of informal financing. SMEs suffered heavily from the increased cost of financing. Informal financial rates are extremely sensitive to the informal loans. From the historical perspective， the bank lending rate for SMEs will rise 0.93-2.48 percentage points from the base rate， lending from guarantee company for SMEs up 3.0-4.2 percentage points， lending from small loan companies for SMEs 2-3.5 times the base rate， and pawn 3-4 times. But SMEs can not obtain loans from banks， rate of loans from guarantee company for SMEs up 8.0-10.0 percentage points， lending from small loan companies for SMEs 3-4 times the base rate， and pawn 4-5 times. Although interest rates are so high， formal private financial institutions business has no money to lend with the hot private financial market.

The real estate firms are the main lenders of informal lending. The real estate macro-control policies have great impact on Hainan property market and turnover fell sharply this year. Many Real estate companies enjoyed selling hotly since 2010 and took expansionary strategy with higher financial leverage. But many real estate enterprises， especially small ones， have finance pressure and capital chain tension is high. Some small developers resorted to informal lending order to survive. According to the survey， the real estate firms consulted informal lending increased 25% over last year.

Recommended policies

As an important component of social financing， informal financing is very important make-up for formal financial services and support the SMEs and rural development. If under reasonable guidance， private capital will play a greater role in the financial intermediation.

Give the private capital greater development room in orderly and formal finance market. Private lending boom reflected the importance of capital capacity of the local formal financial system and real economy. To encourage private capital investment in various forms in the financial industry， relaxation of threshold private capital in equity for small financial institutions should be concerned. Local government should create appropriate policy environment for long-term development of SMEs， strengthen the local industrial development plan， arrange some fiscal support for the development of SMEs， and increase industry support for efforts to divert funds to the effective production.

Strengthen to monitor and keep eye to early warning of private financing problems. Establishment of financial monitoring system for private financing， including the SME associations， Bureau of Statistics， micro-credit companies and other organizations on a regular basis. We should focus on monitoring the scale of informal financing sources， regional and industry distribution， interest rate， term and credit rating of informal financing sources.

Strengthen the management of financial intermediary， especially the informal financing. In recent years， the intermediary institutions， such as financial guarantee companies and investment companies， have developed rapidly. These institutions are mostly registrated by the Trade and Industry or Bureau or Office of Finance， and separated from the formal regulatory framework of People’s Bank of China. So there are the financial risks， especially default risk， which should be concerned seriously.

(Authors: from Haikou subbranch， People’s Bank of China)