At a State Council executive meeting in August, Premier Wen Jiabao said the central government would step up efforts to help SMEs raise funds, including the long-awaited growth enterprise market, which is finally set to open at the Shenzhen Stock Exchange in October.

Many experts, however, say only by establishing small and medium-sized banks (SMBs), as well as more town and village banks, can SMEs get the support they so vitally need.

"China's banking system has a severe lack of SMBs and regional capital markets," said Yao Yang, a researcher at the national school of development at Peking University. "In recent years, the nation has had a big savings rate but the amount of domestic investment has been too small.

"It is abnormal that such a large proportion of savings would remain idle while so many SMEs are mired in financial troubles. Compared with big banks, SMBs would be far more likely to grant loans to smaller firms as they have far less funds but simpler procedures.

"The banking industry has already opened up to foreign banks, and it's unfair there are so many barriers for domestic private investors."

Speaking at the World Economic Forum in Dalian rencently, Liao Min, spokesperson for the China Banking Regulatory Commission, told China Daily that 1,000 new SMBs would be set up in the next three years. Controlling the risks of a loan also remains a huge challenge for creditors and debtors.

The Poverty-Alleviation Economic Cooperative in Yixian county, Hebei province, was started by the CASS in 1993. Like the trailblazing Grameen Bank in Bangladesh, the cooperative offers small loans to poor individuals, of which there are at least 15 million living in China.

"We don't require a mortgage and, with a mutual guarantee provided by any five households, one family can borrow up to 3,000 yuan," said fund worker Xiao Tian, 30. "The only criteria are applicants must be 18 to 50 years old, in good health and have tangible business items, such as livestock."

People can choose to loan cash over 12 months at an 8-percent monthly interest rate, 50 weeks at 2 percent or six months at 15 percent, she said.

"One problem, though, is our system is not strict enough and it is hard for us to investigate properly whether someone is a potential cheat," she added. "Two years ago, one man ran off without paying back a 15,000-yuan loan he got with a five-household guarantee. I had to follow him all the way to Beijing and beg him to give the money back."

Risks are inevitable with any investment but they can be controlled, according to many financial experts, including those at MicroCred, a foreign-backed firm offering micro-finance services in Nanchong, Sichuan province, that has extended 3,500 loans totaling 80 million yuan since it launched in December 2007.

"We offer loans up to 100,000 yuan to SMEs and farmers, but our average is for about 20,000 yuan, so risks are not that high," said a manager surnamed Chen, who added that, of the company's 30 staff, 18 are account managers assigned to vet potential borrowers.

"Their job is to collect as much information as possible about customers' businesses, capital requirements, and claims and liabilities. They even find out an applicant's personal habits, such as what brand of cigarette they smoke, as well as visit them regularly to offer business advice."

Louis Lim Tian Fuh, managing director of SME banking for the Shanghai-based Standard Chartered Bank, agreed that investigating customers' backgrounds and checking the market prospects are important measures to reduce the risks of lending.

"Our company also requires clients to pay and receive money through our bank, which will enable us to keep a check on their cash flow," he added.

Banks may worry about the money they lend to SMEs, but a series of scandals exposed this year has also highlighted the risks SMBs face.

In February, a credit guarantee company cheated Beijing Rural Commercial Bank out of 460 million yuan using fake documents, and four months later, Wang Xin, vice president of Guangdong Development Bank, was arrested on suspicion of allegedly profiting from auctioning off bad debts at cut-rate prices.

"Encouraging private investment may bring more risks to the financial system but there is no reason to throw the baby out with the bathwater," said Yao. "China needs to establish an effective regulatory system to monitor the banking sector.

"The key is to prevent joint frauds by banks and surety companies, such as the case with the Beijing Rural Commercial Bank, and this is why the People's Bank of China must shoulder more responsibility in supervising SMBs."

The central bank monitors local banking sectors through regional branches in the cities of Shanghai, Tianjin, Guangzhou, Nanjing, Shenyang, Wuhan, Xi'an, Jinan and Chengdu; operations offices in Beijing and Chongqing; 303 municipal sub-branches and more than 1,800 county-level sub-branches.

"If these branches all function correctly, they can safeguard financial stability within their jurisdictions," said Yao.

CASS researcher Liu feels deposit insurance and risk-sharing systems are also essential and mean local governments would not have to be heavily involved in a strict supervising system.

"Governments don't need to bear all the risk. It should be shared between the depositor, the bank, the insurance companies," he said. "There is also the risk local governments may see SMBs as personal piggybanks and force them to loan its departments huge sums of money.

"If local authorities interfere too much, it might lead only to more serious debt."

(China Daily September 16, 2009)