News Center



Home News Center News

Shared Responsibility for Loans Made during Pandemic

Aug 14-2020   



Financial institutions, especially banks, have been taking on too much policy responsibility for supporting medium, small and micro-enterprises during the pandemic, possibly leading to higher financial risk and weaker capacity for supporting the real economy in the future, says Prof. Huang Yiping of the NSD in a commentary. To avoid potential hazards, he suggests that such policy-related financial consequences should be shared by fiscal authorities, policy banks or the Central Bank, and not fully left to commercial financial institutions.

 

Financial institutions have been offering significant support to medium, small, and micro-enterprises, which saw a year-on-year increase of 25.4% in total outstanding loans in the first half of 2020, 12% higher than the average loan growth. Such counter-cyclical credit expansion, in particular for small and micro-enterprises, reflected the functioning of policy and didn’t result entirely from market-based credit decisions. In other words, there were limited channels for fiscal support to reach medium, small and micro-enterprises; consequently, financial institutions, notably commercial banks, assumed a great deal of policy responsibility in this regard.

 

In time of crisis, it’s not surprising that certain policy functions are carried out by commercial banks. The key question, though, is who ought to bear the majority of financial responsibility. The IMF once proposed setting up a special-purpose institution for handling the financing needs of medium, small and micro-enterprises during the pandemic, wherein a certain country’s commercial banks should be responsible for loans, its Central Bank should provide liquidity, and its Ministry of finance should act as a backstop to handle any losses that might arise. The proposal seems highly unlikely to be implemented in China, but the PBOC’s recent purchase of a batch of loans to medium, small and micro-enterprises shows that it provides liquidity while also assuming part of the fiscal responsibility.

 

Financial institutions have been required by the government to expand loans and compress interest spreads. At the same time, the behemoth banks, primarily state-owned, have been piling in to make loans to small and medium enterprises, which is hardly their comparative advantage. As a result, small and medium banks are seeing their businesses severely impacted. If such issues persist, financial institutions might become even more averse to making loans to the real economy in the future, with the possibility that medium, small and micro-enterprises might find it hard to secure loans in the second half of the year.

 

As the PBOC and the Ministry of Finance both report to the State Council, the monetary policy and fiscal policy are under the direct control of the government. The PBOC and monetary policy have hardly been independent. Therefore, there’s room for the Central Bank to try assuming part of the fiscal responsibility during the crisis, as long as it doesn’t turn into a conventional measure. 

Shared Responsibility for Loans Made during Pandemic

Aug 14-2020   



Financial institutions, especially banks, have been taking on too much policy responsibility for supporting medium, small and micro-enterprises during the pandemic, possibly leading to higher financial risk and weaker capacity for supporting the real economy in the future, says Prof. Huang Yiping of the NSD in a commentary. To avoid potential hazards, he suggests that such policy-related financial consequences should be shared by fiscal authorities, policy banks or the Central Bank, and not fully left to commercial financial institutions.

 

Financial institutions have been offering significant support to medium, small, and micro-enterprises, which saw a year-on-year increase of 25.4% in total outstanding loans in the first half of 2020, 12% higher than the average loan growth. Such counter-cyclical credit expansion, in particular for small and micro-enterprises, reflected the functioning of policy and didn’t result entirely from market-based credit decisions. In other words, there were limited channels for fiscal support to reach medium, small and micro-enterprises; consequently, financial institutions, notably commercial banks, assumed a great deal of policy responsibility in this regard.

 

In time of crisis, it’s not surprising that certain policy functions are carried out by commercial banks. The key question, though, is who ought to bear the majority of financial responsibility. The IMF once proposed setting up a special-purpose institution for handling the financing needs of medium, small and micro-enterprises during the pandemic, wherein a certain country’s commercial banks should be responsible for loans, its Central Bank should provide liquidity, and its Ministry of finance should act as a backstop to handle any losses that might arise. The proposal seems highly unlikely to be implemented in China, but the PBOC’s recent purchase of a batch of loans to medium, small and micro-enterprises shows that it provides liquidity while also assuming part of the fiscal responsibility.

 

Financial institutions have been required by the government to expand loans and compress interest spreads. At the same time, the behemoth banks, primarily state-owned, have been piling in to make loans to small and medium enterprises, which is hardly their comparative advantage. As a result, small and medium banks are seeing their businesses severely impacted. If such issues persist, financial institutions might become even more averse to making loans to the real economy in the future, with the possibility that medium, small and micro-enterprises might find it hard to secure loans in the second half of the year.

 

As the PBOC and the Ministry of Finance both report to the State Council, the monetary policy and fiscal policy are under the direct control of the government. The PBOC and monetary policy have hardly been independent. Therefore, there’s room for the Central Bank to try assuming part of the fiscal responsibility during the crisis, as long as it doesn’t turn into a conventional measure.