Foreign Banks Target SMEs

The small- and medium-sized enterprises (SMEs) in China have been haunted by financing problem for a long time since the occurrence of financial crisis last year. The domestic banks are less willing to lend loans to them because of the risks. But the foreign banks find the commercial opportunity in this field.

For the foreign banks which have already started their businesses China, the financing problem of the SMEs in China is a “golden mine”. On the one hand, there are a large number of SMEs in China. Their development potential is unlimited. Therefore, there is a large gap in the demand for the financial services; on the other hand, if the foreign banks want to improve their development pace, they must depend on the huge number of SMEs to solve the disadvantages of small business coverage and lack of resources. Thereupon, the foreign banks, which mainly aimed at the high-end individual customers when they initially got into China, began to shift their development strategies in recent years, turning their focus to the SMEs in China.

Large Gap in Financial Demand

According to the statistics of the General Administration of Industry and Commerce, 99% of the enterprises in China were the SMEs at the end of 2008. They also contributed 60% to the GDP of China and engaged 70% of the new jobseekers. However, such a large number of enterprises were not attached great importance by the banks. According to the survey of the foreign banks, only 12% of the SMEs’ capital came from the loans. The proportion is even lower than Malaysia’s 21% or Indonesia’s 24%. Therefore, there is a large gap in the SMEs’ financing demand. The foreign banks have already seen this point. Compared with the state-owned banks in China, the foreign banks are in adverse situation in customer resources and business coverage, and the amount of saves and loans which is limited by the policies. Therefore, SMEs are a big cake for their development in China.

Furthermore, the foreign banks have accumulated a large amount of international financial experience, which endows them with stronger competitive power in products development and customer service. Therefore, apart from the basic credit business and financing products, the foreign banks can also commit themselves to providing the SMEs with a series of financial solutions, including financial planning and so on, to help the SMEs improve their financial efficiency.

For example, Citibank has already introduced the solutions for supply chain financing, which is targeted at meeting the demand of SMEs in income and expenditure of the supply chain. It can help the suppliers improve their relationship with the core buyers. The banks can provide the suppliers with convenient financing way only based on the confirmation of buyers’ payment settlement. In that way the enterprises can accelerate the reflow of corporate sales income to the banking system and reduce the risks during the account period and the exchange rate risk brought by the cross-border trade.

Moreover, the enterprises in Mainland China have been facing a new currency environment since the exchange reform of the RMB. The increase or decrease of exchange rate directly influences the enterprises’ profit. In this aspect, the foreign banks with more foreign exchange operation experience can give the SMEs in China more help and guidance, including the usage of convenient financing way to repay the US dollar credit and finish exchange settlement as quickly as possible.

Advantages Embodied in Global Networks

The directors of the Guangzhou branches of Bank of East Asia, Standard Chartered and HSBC all thought that the financial crisis is not a crisis for the foreign banks in China; instead, it brought a lot of opportunities. The foreign banks have powerful global networks and international liquidation systems, enabling them not only to provide abundant assets management solutions but also to help the SMEs, especially the export-oriented SMEs to develop their businesses and avoid risks.

Presently, the foreign banks including the three banks mentioned above all list the Yangtze River Delta Areas and Pearl River Delta Areas as their first choices to develop the businesses related with the SMEs. The biggest reason is that most of the export-oriented SMEs in China are located there. According to the investigation of HSBC, there are 962 thousand SMEs with annual sales amount of less than 200 million yuan (USD 29.3 million) in these two areas, 20% of which are the export-oriented enterprises. The advantages of those foreign banks in the global networks put them in a superior place in developing the businesses related with the SMEs in these areas.

Take HSBC for example. This bank has 8500 branches in 86 countries or regions. The huge number of branches can help the SMEs in China to evaluate the credit records of its overseas buyers. In addition, HSBC has more than 3 million industrial and commercial customers worldwide. If a Chinese SME’s buyer is just a customer of HSBC, the risk of collection of payment is greatly reduced.

Then, the financial crisis caused the shrink of the US and European market. The Chinese enterprises increased their trade volume with the emerging markets in Africa and Middle East. For Standard Chartered which has unparalelled predominance in the emerging markets, its financial service platform’s advantages were fully utilized. Actually, Standard Chartered has applied itself to providing the SMEs in Guangdong with variety of financial products. In addition, it capitalizes on its self-owned international networks to build a platform for those SMEs. In 2007, Standard Chartered invited its customers in Malaysia to China to make deals with the Chinese domestic enterprises. In 2008, the bank brought its customers in Africa to China to build connection with the Chinese SMEs.

Cases of How the Foreign Banks Develop the Businesses Related with SMEs

In 2003, Standard Chartered began to develop their SME customers. The main product was the “SMEs’ Comprehensive Financing Business”. In May 2006, Standard Chartered introduced the non-mortgage small amount credit loans in China. Beijing, Shanghai and Shenzhen were chosen as the pilot cities. Standard Chartered became the first foreign bank from which the enterprises can get loans only based on the credit guarantee of the corporate legal representative.

In 2004, Citibank launched its SMEs Project. It set up commercial banking department in China, which was the earliest department specialized in providing services for SMEs among all the foreign banks. In July 2005, the China Banking Regulatory Commission published the Guiding Advices on the Banks’ Development of Credit Business for SMEs. Encouraged by the new policy, more foreign banks started the same business.

In 2007, the Chinese government conducted macroeconomic adjustment and squeezed the credit amount of the commercial banks. The Chinese domestic banks were limited by the maximal 75% loan-deposit ratio and were short in the capital. The foreign banks got 5 years’ reprieve for this limitation. The expansion of foreign banks in credit amount will be increased till 2011. These banks also take this opportunity to develop more SMEs into their customers. Previously, the foreign banks had made use of the three years in which the restriction of their public RMB businesses was cancelled to build up a platform for the businesses of SMEs.

In 2008, HSBC comprehensively started its SMEs business in China. Also in that year, Standard Chartered introduced its non-mortgage small amount credit loans to the whole country. The quota was increased from 500 thousand yuan (USD 73.25 thousand) to 1 million yuan (USD 146.49 thousand). The term of repayment was also lengthened from 2 years to 3 years.