The strategy analysis of city commercial banks to SMEs credit: Based on the Bankof Dongguan to local SMEs credit
Bank Of Dongguan

Jing Zhao

huizhou university

Yaqin Guohuizhou university

Chuanjin Kang

Abstract
In current China, the economic diversification simulates the development of native Small Medium
Enterprises (named as SMEs for short). At the same time, banking industrial also becomes morediversified that increasingly city commercial banks are getting more important to bloom local
economy. City commercial banks therefore undertake the responsibility to support local SMEs.
The local banks have many advantages to invest in SMEs. However, the inherent shortcomings of
SMEs lead to higher credit risk when borrowing form banks. The essay firstly introduces thecurrent situation of SMEs’ credit in Dongguan, Guangdong Province. Then the essay analyzes therelationship between local commercial banks and SMEs credit: why the SMEs meet difficulties inborrowing and why the city commercial banks will benefit to invest in small companies. Thirdly,
the essay takes the Bank Of Dongguan (named as BOD for short) as example of local banks in
Dongguan, and illustrates the outcomes of BOD in carrying out SMEs credit. Finally, this report
gives detailed analysis of BOD’s specialized strategies to SMEs credit. In all, city commercial
banks invest in local SMEs will benefit both sides.
KEY WORDS: city commercial banks, BOD, SMEs, credit stratergies.

1. Preface
Dongguan, a city located in the eastern of Pearl River Delta, bordered on Guangzhou, Shenzhen
and Huizhou, is famous as its manufactory industrial. Dongguan economy rapidly develops indecade, and large numbers of native enterprise expend their business and have increasingly
borrowing demands. With increasing competition in banking industry, the city commercial banksneed to cultivate more relative advantages to compete with countrywide banks. Local banks haveclose relationship with native government and economy. Although these banks are smaller andtheir operations are less professional than other big banks, they have their unique advantages incarrying out SMEs credit. Compared with national banks, the local banks are more familiar with
the native enterprise and have more flexible interest policies. Smaller scales of city commercial
banks limit their ability to afford credit risk, so expanding their credit to SMEs is a vice choicebecause SMEs borrow less money and give less loss if they cannot give the money back. Nationalbanks focus more on big enterprise which can give them more profits, as result, the local smallbanks face less competition in SMEs credit business.
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According to the central bank of Dongguan branch, during 2013 the credit scale of large
enterprise decline but the scale of SMEs credit grows rapidly, meanwhile the long-term loans
grows fasterthan the short-term loans. In the end of 2013, the saving deposit of whole banks in

Dongguan is around 887 billion and the total outstanding loan is around 498 billion. The rapid
development of SMEs credit owns to that the number and borrowing demands of SMEs increase.
Banks also focus on and expend their SMEs credit business.
However, SMEs have their own insufficiencies which increase their difficulties to borrow moneyfrom banks. The small plants are basically have less assets to afford operation risk which increase
their credit risk, and most SMEs do not have standard financial statements to reflect real profits
which is a problem for banks to value them. Although the SMEs have difficulties in borrowing, we
can never deny that SMEs are important in creating social wealth. Therefore, we need toaccelerate and facilitate SMEs credit and city commercial banks, undoubtedly, are crucial
participants in expanding financing to SMEs.

2. The relationship between local commercial banks and SMEs credit:
The unique characteristics of city commercial banks make them more advantageous in expanding
SMEs credit. Meanwhile, the shortcomings of SMEs limit their abilities to borrow from big banks,
therefore borrowing from local banks is a good choice for both side.
2.1 SMEs meet difficulties in borrowing:
2.1.1 SMEs’ operation is less healthful and standard.
Most SMEs in Dongguan engage in manufacture industry, with less advanced technologies andmanagement. Most SMEs are family enterprise. The owners are largely less educated withmanagement skills, and their management mostly is not standard. One obstacle hinders SEMs
borrow from banks is that their financial information is much less transparent. Most plants do nothave standard financial statements. They also prefer to trade with their customers in cash ortransfer in personal accounts rather than company accounts in order to pay less taxes. As result,banks face many difficulties and spend more time in value the SEMs’ operations and profit. Thisdecreasing the banks’ efficiency and, most important, increase their credit risks and decrease thewiliness of lending to SMEs.
2.1.2 SEMs are lack of standard collateral.
In Dongguan, many house properties, including workshops of SMEs, are built by natives, andthese properties cannot receive official property ownership certificate. The SMEs have more credit
risk in borrowing, and thus banks do need mortgage properties as collateral. Cannot provide
property ownership certificate, SEMs certainly face difficulties in giving standard collateral. The
SMEs have other method to give collateral, such as they can use their machineries, inventories or
receivables as collateral. However, this collateral is also hard to value which needs very2

professional skills and increase costs. Most banks prefer not to use these as collateral.
2.1.3 SMEs credit increases the cost from banks’ standpoint.
From the banks’ standpoint, the examination and approval procedure of loaning to big enterpriseand to SMEs are same. However, the money loan to big enterprise definitely larger than SMEs,
giving more profits to banks. That means, comparing with loan to big enterprise, banks spend
same time and work in loaning to SMEs, which on contrary gives less profit to banks. On the other
hand, the characteristics of SEMs decide that their borrowing needs is small amount but are veryfrequent and urgent, which also increase banks’ lending cost. This fact simulates banks preferlending to big company rather than SMEs.
2.2 SMEs credit benefits more to city commercial banks.
2.2.1 City commercial Banks face less competation to serve SMEs
As mentioned above, lending to SMEs is much costly than to big companies. Big company credit ismuch profitable thus much national bank prefer to serve larger companies. Based on this fact,
local commercial banks are less competitive to serve large company. From the standpoint of SMEs,
most SMEs in Dongguan is manufacture plants and do not have advanced technologies and corecompetitiveness. When dealing with big banks, they have less Bargaining Power. So SMEs alsoprefer to borrow from local banks, which are more flexible and can give lower credit interest.
2.2.2 SMEs credit gives city banks more diversification benefits.
Because their assets base is smaller than national banks, the local commercial banks need focus
more on risk management. Spreading their customer among many SMEs will give remarkablediversification benefit to local banks. On one hand, by lending money to many SMEs rather than
one big company, banks suffer relative smaller loss if one SME fail to pay the money back. Higher
concentration gives larger credit risk if one customer or certain industry faces difficulties. On theother hand, big company's borrowing is usually in large amount and long-term, which will
decrease the banks' liquidity. Therefore, spreading customers among SMEs enhance small banks'
ability to handle credit risk.
2.2.3 Local commercial banks are more familiar with the native customers
Although the national banks have more professional stuff, the local banks still have advantages oncollecting native information. The local commercial banks have large number of branches
spreading all over the city, located near their customers; the stuff can easily and frequently
connect with their customers. Furthermore, the stuffs of local banks have closer social networks
with native plant owners, and many customers are even their relatives or friends. This strong point
definitely help the city banks know more precise information about SMEs operation condition andowners' personalities. Being more familiar with native SMEs helps to decrease risk of city banks
when invest in SMEs.
33. The introduction of Bank of Dongguan to SMEs credit.
3.1 The introduction of Bank of Dongguan.
BOD, is short for Bank of Dongguan, is one of the most important native banks, and has morethan 100 branches spreading every district in the whole city. By the end of 2013, the total assets of
BOD reached 163 billion, the saving deposit was 108 billion and the outstanding loan was 68
billion. In last year, BOD realized 1.9 billion net profits, a 2.67% increase by last year. BOD
occupied 13.79% in all banking companies’ deposits in Dongguan, absorbing most companies’
deposits. BOD aims to serve the local economy, native SEMs and native people in Dongguan.
BOD plans to focus on SMEs as main customers and provide service to SMEs by creating new
products and improved services.
3.2 The current situation of BOD to SMEs’ credit business.
The president of BOD established a goal that, BOD would set SMEs as its main customers andprovide more professional and efficient service to them, following the government announcementthat the native economy should strongly support SMEs’ development. BOD gives SMEs thepriority of receiving loans. The annual report of BOD tells that, by the end of 2013, BOD lends
capital to SMEs up to 53 billion, giving a growth of 20% during the year. The SMEs’ outstandingloans occupied 84.8% for all the money that BOD lends to companies. The number of SMEs thatreceive BOD’s credit was 538 more than last year, a 53.85% growth. This statistics obviously
shows that BOD does perform their vital function on investing SMEs in native.

4. The BOD develops strategies in order to better serve for SMEs credit.
The native SMEs have inherent shortcomings which make them risker when borrow money. BOD
also has advantages which assist it to cultivate strategies in order to better serve SMEs credit.
4.1 BOD designs specialized products to solve SMEs’ credit problems.
4.1.1 The Songhuyanyu Project introduces government to perform as guarantee to SMEs.
BOD designs new products especially for SMEs. One of the most famous products called
Songhuyanyu Project, which is named as a native beautiful lake called Songshan Lake. In thisproject, the native government selects and recommends outstanding local SMEs, mainly small
technological SMEs, to BOD and the government performs as guarantee to promise sharing thecredit risks. By thoroughly valuing this project, BOD lends money to the SMEs, which includes in
the list that the government recommended. In this way, BOD can lower its credit risk from lending
to SMEs, because the government performs as guarantee. The process of examination and loaning
is significantly simplified, thus the bank can work very quickly and efficiently. To better serve thelocal SMEs, BOD set up a new branch near Songshan Lake to carry out the Songhuyanyu Project,
the SMEs enjoy a very efficient and special credit service. The Songhuyanyu Project is very
successful and it was awarded as the Best Servicer for SMEs by Nanfang Daily, and the First
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Place of Financial Creation in Dongguan rewarded by the local government.
4.1.2 SMEs owners can use other asset as collateral, not just standard real estates.
There are other kinds of products in BOD, aiming to solve SMEs’ problems of lacking standard
collateral. All these kind of products are designed according to the local economy situation and
SMEs’ financing needs. Because of some historical problems of estate property, most real estates
the SMEs’ owner use as factories cannot receive the official property certification. Therefore, theSMEs face difficulties to use these real estates as collateral because they are lack of property
certification. However, many owners lend the estate to other business managers, and can receive
the rent income and pay banks’ outstanding loans. In this situation, BOD allows these SMEs
owners to use their rent income as collateral. They go though process and put their rent income
into certain account in BOD as BOD requested, and then BOD will lend money to SMEs. Apartfrom using rent income, BOD also allow the SMEs to use machineries or other fixed assets as
collateral. These products do help to reduce credit risk and assist SMEs credit.
4.2 BOD perfectly simplifies the procedure of examination and approval for SMEs credit.
To better serve for SMEs’ credit business, BOD actively set up its specialized team to carry out the
SMEs’ credit projects. These kinds of teams are oriented on integrated financial services for SMEs,
such as credit analysis, wealth management, bills exchange and financial advice. In nearly every
branch, BOD establishes its SMEs’ team which apart from its team serves for enterprise. As mostSMEs’ financing demands are usually urgent and frequent, arrange professional stuff and simplify
the credit procedure can significantly give many convinces and efficiencies. To simplify theprocedure, the head office gives the presidents of branches, who have already passed thoughcertain qualifying examinations, the right to value and approval certain SMEs credit applicationin branches rather than apply it to head office. The later will spend a lot of time to go through theprocedure. Furthermore, BOD also simplifies the application forms and other supporting
documents for SMEs credit, enhancing the efficiency. Finally, BOD frequently gives professional
training to SMEs’ team stuff in order to improve their working abilities and efficiencies.
4.3 BOD enhances its risk management and control abilities to SMEs credit.
Because SMEs have relatively high credit risk, BOD has to enhance its risk management andcontrol abilities to decrease this risk. BOD especially emphasizes that its stuff should do carefuland comprehensive before-credit examinations, avoiding from credit loss from SMEs. Firstly, stuff
need do better on-site inspection, to understand company’s real operation situation and theowner’s personality. And the off-site inspection is also important, including the research for its
counterparty’s evaluation and the industry’s economy condition. They can compare the on-site andoff-site inspection to decide whether the owner tell truth about its company and how his trait.
Secondly, the non-financial and financial risk is most important in risk analysis. This is a big
problem for SMEs because in these plants, the financial management is not standard and5transparent, and the most financial statements for SMEs are faked to some extent. So the financial
risk for SMEs is more serious than for enterprise. To better understand SMEs real financial
condition, stuff should analyze very compressive financial and non-financial documents, including
financial statements, the bill exchange details of banking account, plants’ real debt condition andreal operation condition. The stuff should consider different information to formulate the real
financial condition.

5. Conclusion.
The rapid growth of native SMEs gives energy to the local economy. In this situation, thegovernment informs that the local economy should better serve for SMEs and the city commercialbank also has responsibility and potential profits to invest in SMEs. Although the SMEs have many
shortcomings which will increase their credit risks, the city commercial banks also haveadvantages to handle these shortcomings. The city commercial banks also enjoy many benefits
from investing in SMEs rather than in big enterprise. In all, the business between city commercial
banks and local SMEs will mutually benefit both side and their cooperation will bloom the local
economy.

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