OREANDA-NEWS. April 04, 2013. "Urbanization construction is now speeding up, and at our company we are getting more and more orders, so our employees are having an even merrier Spring Festival holiday." Looking at the busy workers, Liu Xingcai, head of Xuzhou Shengong Engineering Machinery Company, said cheerfully.

The new orders brought Liu both joy and worry. He was happy because of the success he had made amid fierce market competition, but he was also worried because his company lacked funds to buy raw material to expand production. Recently his company obtained a uniform SME loan of 2 million yuan from China Development Bank (CDB). He said with much relief, "This loan has helped us increase production capacity so now we are more confident when receiving orders. Nowadays it's fashionable to ask people if they feel happy in life. I can tell you that I feel very happy!"

In fact, nearly 2 million SME business owners are as happy as Liu, and their happiness is attributable to CDB, which has always been known for large lending projects. In recent years, SME lending has increasingly become an important measure for CDB to support the real economy and improve people's livelihood. As of the end of 2012, CDB's SME loan balance stood at 1.81 trillion yuan, supporting 1.87 million SMEs and individual business owners and creating nearly 5 million jobs. CDB's financing has supported 20 industries including manufacturing, farming, forestry, animal husbandry and fishery, and has benefited SMEs, micro enterprises, individual business owners, young entrepreneurs, urban laid-off workers, rural working women and other social groups.

National bank cares about improving people's livelihood

Large enterprises bring wealth to the country, and small enterprises bring wealth to the people. If large enterprises are the artery and skeleton of the national economy, the vast numbers of SMEs are its capillaries and cells. These SMEs are closely linked with the daily life of 1.3 billion Chinese people and have a bearing on the joys and sorrow of all ordinary people.

According to statistics, SMEs in China account for more than 99% of all enterprises nationwide, provide more than 80% of urban jobs, have completed more than 75% of the enterprise technology innovation, and have paid 50% of the national tax revenue. They play an important role in promoting economic development, expanding private-sector employment, and improving people's living, and have become the most vigorous and vibrant sector in the market economy.

In recent years, the CPC Central Committee and the State Council have attached great importance to the development of SMEs. A number of senior leaders have conducted intensive investigation and study of the SME financing problem, and relevant departments have also issued multiple documents to call for increased support for SMEs. As a government developmental financial institution, CDB takes "strengthening national strength and improving people's livelihood" as its mission, actively implement the central leadership's strategic arrangements for supporting the development of SMEs, and make efforts to explore an SME financing mechanism in line with China's national conditions.

It is well known that, due to the deficiency of credit, lack of information, and high operating costs, SME financing has been a worldwide problem. For CDB, a wholesale bank, to engage in financing for the vast numbers of SMEs does pose many difficulties in terms of manpower and organizational structure, but to help solve the nation's and the people's problems happens to be a maxim that guides how CDB does business.

In 2002, the 16th Party Congress put forward the grand goal of building a well-off society, and to crack the problem of SME financing is precisely an important link in achieving that goal. In order to achieve the goal of "letting everyone enjoy equal access to financing", in 2003 CDB began to build up its SME financing business.

CDB officials said the bank decided to launch SME lending due to three considerations: 1) CDB wanted to fulfill its social responsibility. As a national bank, CDB is duty-bound to consolidate existing policy resources through market building, credit building and institutional building, break open the SME financing bottleneck, and support development in people's livelihood. It is also a strategic choice for CDB to take the initiative to assume social responsibility and promote social development. 2) It was also required for CDB's own development. Large enterprises can tap direct financing such as stock exchange listing or debt issuance, while there is huge market and development potential in financing SMEs, so SME lending will become a blue sea for CDB's development. 3) CDB already had practical experience in developmental finance. CDB was already familiar with effective developmental finance means in big projects and had accumulated rich practical experience, so it could act as a bridge between the government and the market in SME lending by turning what is hot with the government and the general public into financial hot spots with the end result of mutual benefit for all sides.

In January 2004, when meeting with David Scott, head of the World Bank's China finance project, CDB President Chen Yuan said, "We want to launch SME lending because China's macroeconomy is at present still in a stage of unbalanced development. In the macroeconomic field, large-project capital investment is quite active, but not enough has been done for SME, the countryside, or entrepreneurship and employment. Many urban and rural SMEs are waiting to develop and there is an urgent need for them to obtain financing support."

In order to break open the SME financing bottleneck, CDB began to tilt its financing support toward grassroots, small amounts, and individual business owners based on the principle of "attaching more importance to microloans and expanding financing coverage". In 2004, in cooperation with the World Bank and Germany's KfW, CDB launched the "Commercially Sustainable Microloan Project for China", which used the method of "funds + technology" to select capable and willing small and medium commercial banks as partners who would provide financing support for the SME end customers. In December 2005, CDB decided on Baotou Commercial Bank and Taizhou Commercial Bank as pilot partners and signed a "Microloan Project Cooperation Agreement" and a follow-on lending contract with them. On 21 December, through Baotou Commercial Bank CDB issued a loan of 15,000 yuan to help an individual business owner with his cash flow. That was CDB's first ever microloan. Although the amount was not large, its significance and role could not be underestimated.

Small steps can make up a thousand miles. By June 2011, when the above project came to an end, CDB had established microloan cooperation with 12 local commercial banks, providing them with free technical assistance and offering medium- to long-term wholesale funds of 1,399 million yuan to six of the banks. Through joint efforts, these six banks have grown a network of 104 microloan service sub-branches with over 1,200 microloan officers. They have made a cumulative total of 240,000 microloans amounting to a total of 24.5 billion yuan (at an average of 100,000 yuan for each loan) with a default rate of below 1%.

Well begun is half done. CDB has been dedicated to the SME lending business ever since the beginning of the microloan project. On 17 October 2012, the 20th International Day for the Eradication of Poverty, on behalf of CDB, its president Zheng Zhijie signed a pilot cooperation agreement with the China Foundation for Poverty Alleviation. That agreement carried a total amount of 1 billion yuan, which is to date the largest amount in the domestic microloan field. In the same month, CDB also signed a strategic cooperation agreement with All-China Federation of Industry and Commerce to further increase financing support for SME development. From a loan of 15,000 yuan to hundreds of millions of yuan in financing support, CDB's business development has always been in keeping with the improvement of people's livelihood.

Retail lending by wholesale means
Although in charge of more than 7 trillion yuan in assets, CDB has only about 8,000 employees, but just a bank like this has effectively eased the financing difficulty plaguing nearly 2 million SMEs and individual business owners. The secret to that is that, by conducting its retail business in a wholesale way, CDB has explored a unique financing system for lending to SMEs.

We have been told that CDB's SME lending business is guided by "financial socialization" and, based on the developmental finance principle of "government attention, timely support, planning ahead, credit building, and promotion by financing", pushes forward the building of various cooperation institutions, and constructs an internal mechanism of sustainable development of people's livelihood related financial business through planning ahead, project reserves, democratic evaluation, guidance by funds, public supervision, and risk sharing and compensation.

A CDB official told the reporter, "To benefit many SMEs while ensuring loan safety, CDB has in its practice explored three models of providing wholesale funding to the SME end customers: uniform lending, follow-on lending, and direct lending."

In the uniform lending model, CDB provides credit facility to a "uniform lending platform" consisting of economic organizations eligible for borrowing and capable of repayment, and the platform will provide funding to SME loan recipients named by CDB in the form of entrusted lending. In practice, this model has also given rise to another mode in which CDB signs a tripartite loan contact with the uniform lending platform and the loan recipient, and directly (or through entrusted banks) provides funding to the recipient. As borrowers, the uniform lending platform -- consisting of government investment and financing companies, leading agricultural enterprises, and financial leasing companies -- assumes the responsibility for repayment.

In this model, CDB follows an operating mechanism of "four platforms and one association", namely management platform, uniform lending platform, guarantee platform, public announcement platform, and credit association. The management platform helps CDB collect project information and make initial risk assessment. Taking advantage of being close to the project, it helps CDB identify and control risks.

The uniform lending platform normally consists of urban construction investment companies run on market principles, state-owned asset management companies, or SME investment and financing companies, who can serve as borrowers in the SME lending business and support approved SMEs with funds from CDB. The guarantee platform refers to the guaranty institutions that provide SME loan guarantees to CDB or the businesses that provide external guarantees. The public announcement platform refers to the channels for effective public announcement through mass media to mobilize social forces to jointly supervise loan safety and control risks based on the principle of open handling of loan requests and public announcements for loan disbursements and repayments. The credit association is a social organization of SME participants.

The "four platforms and one association" model is consistent with the characteristics of SME development, so it has been in use ever since it was developed. Continuing innovation on that basis, CDB has also experimented with a series of loan products such as "boosting credit with guaranty institutions", microloans with guarantees, "loan upon guarantee", and microloans for women. CDB has already formed a series of business product systems, effectively overcome the deficiency of its limited branch network and manpower, and laid a foundation for the rapid development of SME lending business.

Follow-on lending is another important model of CDB's SME lending. In this model, CDB provides credit facilities to small and medium banks, financial institutions, and microloan lending companies qualified to lend and approved by CDB ("follow-on lenders"), who will then provide funding to the SME end customers based on their agreement with CDB. The follow-on lenders disburse, supervise, and recover the loans and assume the ultimate repayment responsibility.

This model first came into being with CDB's follow-on partner banks in CDB's World Bank microloan project. Those partner banks included 12 banks including Baotou Commercial Bank, Taizhou Commercial Bank, and Ma'anhan Rural Cooperative Bank, who, in conjunction with the relevant technology from Germany's IPC GmbH, have contributed to the development of commercially sustainable microloan lending in China. Later on, in accordance with relevant policies of the People's Bank of China and the China Banking Regulatory Commission, CDB further expanded its follow-on lending partners to rural township banks, rural commercial banks and other rural financial institutions. In recent years, with the launch of the microloan lending company pilot scheme nationwide, CDB has also entered into cooperation with microloan lending companies across the country on "concept + funds + technology + IT",which also includes the provision of wholesale funds.

In addition, direct lending is also one of the ways CDB carries out SME lending. In this model, CDB signs a loan contract with its SME customers in a direct creditor-debtor relationship, and CDB will directly provide the credit facility or through entrusted banks to handle settlement. Although this model lacks an entity that receives wholesale funds, CDB uses mechanism building as a basis to bring in small and medium commercial banks, guaranty companies, and other social cooperation institutions, gather its SME customers, and improve business efficiency through wholesale and standard operating procedures to handle the business in a concentrated and wholesale manner.

"In fact, although it is direct lending, CDB funds still reach the SME customers in a wholesale way," said the CDB official.

Developmental finance "teaches people fishing"

In the field of SME lending, the greatest difference between CDB and commercial banks is that, while commercial banks rarely involve themselves in non-mature market sectors, CDB uses the principles of developmental finance to build markets and "teach people fishing". CDB has developed roads where there was none by fostering a large number of SMEs, individual business owners, and farmers in an initial stage of development.

Youth entrepreneurship is an important method of adding new blood into a country's commercial environment. It not only solves the issue of youth employment but can also continually bring new thinking and new ways into business circles and push forward the development of the national economy. But youth entrepreneurship can also face the plight of funding shortages. Entrepreneurial projects tend to be weak in managing risks and lack collaterals, so it is often hard for them to be acceptable to commercial banks. CDB has worked hard to break open the youth entrepreneurship funding bottleneck by actively working with the Communist Youth League and human resources and social security departments to ease the funding difficulty for entrepreneurial youth with wholesale approaches.

In 2006, CDB and the Central Committee of the Communist Youth League joined hands for the first time in implementing a "Youth Entrepreneurship Microloan Project". On that basis, the two sides cooperated again in 2009 to deepen this project by giving priority to young people in business for the first time in order to increase the project's beneficiaries and expand its coverage. The project takes advantage of CDB's cooperation mechanism with local governments and the organizational network of the Communist Youth League. The League collects youth entrepreneurial projects and their financing requirements and carries out entrepreneurial training, counseling and feasibility study, while CDB conducts loan evaluation and approval and breaks open the financing bottleneck for youth entrepreneurship with wholesale approaches.

Financial support is the weakest in the countryside, and rural SMEs have for a long time suffered because of the credit and mechanism deficiency and have been unable to obtain support from financial institutions. For CDB, however, the rural market represents a valuable "blue sea" for a simple reason: in the course of new rural building and urbanization construction, the future Chinese countryside offers huge potential for SME lending.

In Qinghai, it has been well known locally that CDB supports rural SME development. In 2008, after a full inspection in Xunhua Salar Autonomous County, CDB made a proposal of a "company + farmers" model to Yijia Ethnic Goods Company to move some manual production from the company to farmers. Specifically, the company will rent eligible farmers' houses as production sites, provide six to eight sewing machines for each production site, and hire 12 to 16 rural women to engage in product processing with piecework compensation. This measure has directly reduced production costs by 6%. At the same time it has accommodated Salar customs and taken care of employment for Salar women, thus playing a leading role in bringing affluence to ethnic minority people.

In the same year, CDB issued a loan of 9 million yuan to Yijia's joint village-company project that produces 15 million crochet Bangladesh caps a year, bringing the number of the "company + farmers" production sites to 100 with jobs for over 800 Salar women and increasing their average annual income by about 8,000 yuan per person. This project has caught the attention of and won praise from many Party and government leaders.

Across the country, rural township banks that have been recruited by CDB are playing the role of rural financial service pioneers. Since the founding of the first rural township bank in Pingliang, Gansu, in 2007, the number of CDB-recruited township banks rapidly rose to 15 within the next five years or so. They have taken measures to support local SME development: Jilin Zhenlai Township Bank innovated to meet the needs of tobacco farmers in support of local industry; Inner Mongolia Dalate Township Bank proactively carried out migrant workers entrepreneurship lending in view of the concentration of local youth entrepreneurship and the lack of entrepreneurship financing; and Hubei Yicheng Township Bank actively issued loans to animal farming households and food processing enterprises in a bid to fill a blank in rural finance.

Whether supporting rural SMEs or helping urban youth entrepreneurship, CDB has always adhered to the advanced methods and concept of developmental finance, strengthened its cooperation with governments at all levels, integrated the government's organizing and coordinating advantages with its own financing advantage, and broken open one after another bottleneck that has constrained SME financing.

In Guangxi, since 2004 CDB has cumulatively supported more than 2,000 SMEs in manufacturing, culture, energy conservation and environmental protection, created over 100,000 jobs, and made important contributions to industrial transformation and improving people's livelihood in Guangxi.

In Chongqing, CDB cooperated with the small and micro enterprise incubation park in setting up a dedicated lending platform for small and micro enterprises. The platform made joint loan applications on behalf of multiple qualified small and micro enterprises along with guarantee from a guaranty company, and CDB would evaluate and approve the loan requests, in a new financial service model with multilateral interaction. As of the end of 2012, CDB has issued cumulative microloans of 9,112 million yuan in Chongqing with a lending balance of over 5 billion yuan and supporting the growth of nearly 1,440 small and micro enterprises.

In addition, CDB has also cooperated with the United Front Work Department of the CPC Central Committee in supporting the development of ethnic regions, frontier regions, and the non-public sector economy; with the Ministry of Human Resources and Social Security in supporting entrepreneurship and employment for migrant workers and laid-off workers; and with the Ministry of Science and Technology in supporting entrepreneurship and development for science and technology enterprises and high-tech workers; and so on and so forth.

"CDB's dedication to pushing forward SME development and people's livelihood related finance is an important demonstration of a national bank's care for the vital interests of the masses as well as a useful attempt at building a harmonious society with developmental finance," said CDB Chairman Chen Yuan.

Financing innovation helps SMEs grow

There are a large number of SMEs with varying operating performance. Although CDB issues loans to them in a "wholesale" way, it does not provide the same financial product to different customers. On the contrary, CDB has, through innovation, created a rich financial product system to offer tailor-made solutions to meet the financing needs of different SMEs.

In Hubei, CDB followed the principle of "planning ahead, market building, public participation, and promotion by financing" and created a lending model that was based on cooperation with the government and an "integration of platforms and network" consisting of the Xiangyang Finance Network and the "four platforms and one association". This model has ensured zero bad SME loan, given timely support for the development of a large number of "grassroots" enterprises, and created more than 5,000 jobs.

In Guangdong, CDB joined hands with the Provincial Finance Office and the Guangdong Re-guarantee Company in developing a product in which the Provincial Finance Office recommends microloan lending companies for cooperation with CDB to lower their financing costs, the Guangdong Re-guarantee Company offers joint guarantees for the loans, and CDB carries out fast and efficient loan evaluation and approval and issues the loans to the microloan companies. As of the end of 2012, the balance of CDB's loans to microloan companies in Guangdong stood at 1.3 billion yuan, accounting for over 50% of all financing for microloan companies, so CDB has become a major bank in financing microloan companies in Guangdong.

In Jiangsu, CDB has developed, based on core enterprise credit, the "supply chain financing factoring" business, which allows upstream SME suppliers to obtain financing by transferring their receivables from core enterprises to CDB. This has eased the financing difficulty faced by upstream SMEs in the industrial chain. As of the end of 2012, a cumulative loan amount of 73.8 million yuan has been issued, meeting the funding needs of a number of SMEs.

In Hunan, CDB brought in venture capital firms and launched the "investment, lending, and insurance" model to serve the development of emerging industries. In this model, venture capital shareholders can add the enterprises they are investing in to a project pool, and CDB's loans and the venture capital funds will jointly finance those projects. At the same time, CDB and the venture capital firms have also designed an effective investment exit mechanism and a risk compensation mechanism. As of the end of 2012, the loan balance under this model stood at 270 million yuan, benefiting 35 enterprises.

In Jilin, through cooperation with local Industry Departments, SME Service Centers, various guaranty companies, rural credit cooperatives, various industry associations and specialty industrial parks, CDB launched a microloan product for individual business owners and micro enterprises and created an operating model of "financing platform + associations and industrial parks + three-tier risk sharing mechanism _ discounting incentive and stop-loss mechanism". After nearly seven years, CDB has issued 1.34 billion yuan in such microloans with a 100% loan recovery rate.

In Zhejiang, Qingdao, Shandong, and other areas, in cooperation with local credit and guarantee associations, CDB selected over 10 guaranty companies to form a credit community that conducted joint loan evaluation and approval and provided joint guarantees, with a role of "1+1>2" and supporting the development of hundreds of SMEs. This kind of credit community has been vividly described as "holding together for warmth".

"CDB adheres to focusing on its customers and making efforts to build a diversified and personalized financial product system in order to meet the financing needs of various kinds of SMEs in different development stages," said a CDB official.

Since 2003, when CDB began to comprehensively push forward SME lending, CDB has made steady progress in carrying out this people's livelihood related business. There are trophies and medals of the "People's Social Responsibility Award" for seven consecutive years in CDB's bank history museum, and awards for "Banking Industry SME Financial Service Specialty Product", "Banking Industry SME Financial Service Advanced Individuals", and other awards from the China Banking Regulatory Commission can also demonstrate the outstanding achievements CDB has made in supporting SME development.

Liu Xingcai was even busier after the 2013 Spring Festival holiday as many orders needed to be fulfilled and new orders kept coming in. Liu was so busy that he often had to eat and sleep in his office. He told a relationship manager from CDB's Jiangsu Branch, "Now is a good time, since the CPC Central Committee is vigorously pushing forward urbanization construction, and those of us who are in the business of machine manufacturing and repairing are benefiting from it. We have a lot to look forward to!" he said excitedly.