China’s central government is stepping up its focus on Xinyidai 信易贷, a government-backed initiative to use social credit data to support loan financing for SMEs.
The new policy, jointly released by the NDRC (the state body responsible for the build-out of China’s social credit system) and CBIRC, calls for increased data sharing between China’s banks and the National Credit Information Sharing Platform, China’s master social credit database.
The basic idea is to use corporate social credit records to mitigate the lack of data available for financial institutions to make credit assessments for businesses and “decrease data collection costs” for the banking industry.
Historically, China’s SMEs have had an uphill battle getting access to bank financing. The lack of any credit histories has made China’s banks skittish about lending to smaller enterprises, meaning most of the big-ticket loans have been funneled to large state-owned enterprises and established corporates that can offer up sufficient collateral to offset risk.
But this is set to change, as the new policy explicitly encourages financial institutions to:
…reduce excessive reliance on collateral guarantees, and gradually increase the proportion of credit-based loans to small and medium-sized enterprises.
Access to social credit files should enable financial institutions to assess risk based on metrics other than loan repayment history, including:
- Tax payment history
- Social security payment history
- Housing provident fund payment history
- Legal records
- Market compliance records (such as safety and emissions inspection results)
- Utility payments and arrears
But even with this expanded picture of small business creditworthiness, lending risks to SMEs are naturally higher than for larger companies. The policy looks to address this issue by encouraging local governments to set up Xinyidai “risk mitigation and compensation funds” to soften losses caused by “untrustworthy behavior such as corporate debt defaults.”
This push is part of a broader suite of policy measures to support lending to private SMEs in China. So far, the measures have not been particularly effective, however, given that the structure of the banking system is built to favor large state-owned companies. Authorities hope to use these beefed up credit profiles to improve the functionality of the banking system over time – but it will be a long, slow process.