By Lu Wei

Since the trial work on credit guarantee for small and medium-sized enterprises (SMEs) was started in late 1998, it has been developing rapidly. At present there are about 200 credit guarantee institutions of various types, which form a SME credit guarantee system, mainly funded by fiscal revenue at the levels of province, municipality, autonomous region and county, supplemented by diverse sources of funds through various hinds of organizations.

In the past year, credit guarantee institutions have launched a valuable experiment on how to offer credit guarantee to SMEs and have played a noticeable role in helping banks expand the scale of their credit loans to SMEs. In some cases, credit guarantee has registered fairly good results. But problems still remain. Firstly, the governments at various levels have directly interfered in the selection of target applicants. Some local government pinpointed the enterprises to be guaranteed, leading credit guarantee to failure or a high compensation rate. Secondly, the scale of guarantee commutation fund is not large enough, with limited backup funds. Most of the governments injected moderate funds into credit guarantee institutions in a lump-sum. The result is that, on the one hand, the guarantee scale cannot be expanded, and on the other, banks do not have confidence in such guarantors who appear to be reluctant to underwrite guarantee business. Thirdly, there is a scarcity of professionals who are familiar with guarantee practice. As credit guarantee is still something new in China, inadequate supply of professionals cannot meet the development of guarantee institutions. Fourthly, the term of SMEs is not clearly defined. Some credit guarantee institutions have overextended their scope of guarantee targets, while others have even committed illegal operations in the name of offering credit guarantee to SMEs. They either engage in speculative activities with guarantee funds, or provide guarantee for loans with speculative purposes, thus posing potential guarantee risks.

All the above-mentioned problems cropped up in the initial stage of a new industry, they can be solved by intensifying management and will not affect the development of credit guarantee to SMEs. Therefore, it is a pressing task to consummate the credit guarantee system for SMEs and the management of credit guarantee institutions.

I. ABC Management of Credit Guarantee Institutions for SMEs

Credit guarantee for SMEs mainly takes two forms: policy guarantee and commercial guarantee. The purposes, nature and management measures of both kinds of guarantee institutions are different.

1. Policy guarantee institutions and their management mode (1) Organizational form of policy guarantee institution funded by government According to international practice, government-funded credit guarantee institutions are managed in the following four ways.

a) A designated government agency directly handles guarantee business. For instance, the Small Business Authorities (SBA) is an agency of the U.S. Federal Government, with its jurisdiction and functions being vested by the Congress to which SBA is directly responsible. SBA reports to the Congress each year on its implementation of the annual plan and submit an annual budget bill for the next year. The plan can be fulfilled only after the annual budget is approved by the Congress.

b) Special legal persons or corporate bodies financed by the government. For instance, Japan''s Credit Guarantee Treasury for SMEs is a special legal person that receives capital funds from the central government. Japan''s Association for Credit Guarantee for SMEs is also a public agency with the status of a special legal person. Its funds come from the Public Treasury for SMEs of the central government and donations by local governments, public associations and financial institutions as well as soft loans from the central treasury and local governments.

In Taiwan Province of China, the credit guarantee fund for SMEs has capital from donations by the local authorities and relevant financial institutions, with the former accounting for 80% or even more. Such is a non-profit corporate body, which covers its operational expenses and commutation with income from funds operations and the premiums from customers. The highest decision-making body of the fund is the board of directors, and the supervisory body is the board of supervisors. The board of directors comprises representatives of fund contributors, while the board of supervisors is composed of government officials and CEOs of banks. The government’s capital injection into the guarantee fund is non-sustaining.

c) Limited liability company established by the government. For instance, the credit guarantee institutions funded by governments in Europe are companies with limited liability. Some are non-profit policy guarantee companies, such as Austrian Financial Guarantee Company, and others are companies with mixed policy and commercial guarantee, such as French Credit Guarantee Company.

d) Special government agency. For instance, the European Community Commission entrusted the European Investment Company as its guarantee agency for SMEs. The relationship between the government and the Investment Company is one of trust and commission. The ECC signs a contract with the agency to specify the guarantee targets, the use of funds, the sharing principle of cost and loss as well as the form of capital injection.

(2) Characteristics of the management of policy guarantee institutions a) They are governed by special laws and regulations. Policy credit guarantee institutions funded by the government use funds from fiscal budget. Most countries have special laws to govern such institutions and the use of their funds, such as the America’s Act on Small and Medium-sized Enterprises, Law of Japan''s Association for Credit Guarantee and Law of Japan’s Credit Guarantee Treasury for Small and Medium-sized Enterprises. These laws have all specified the form of government-providing funds, and the nature, administration mode, business scope, guarantee targets of guarantee institutions, as well as relevant policies.

b) They implement a commutation system. Guarantee is an industry with high risk. The purpose of policy guarantee is to obtain social benefit. So there must be a certain amount of funds for commutation. Most governments offer constant financial commutation to policy guarantee for SMEs in varied forms. In the United States, the Congress approves the annual budget each year in light of the implementation of the plan on secured loans to SMEs and of the actual needs. In Japan, the guarantee loss incurred by the guarantee association is repaid by the Public Treasury of the central government with credit insurance fund. In France, when the credit guarantee company has to indemnify any loss under policy guarantee, the loss will be directly covered by the government and entered into a special project account. ECC makes financial replenishments to a given size in several years so that guarantee agencies can operate on their own.

c) The system of management by fund contributor. The government''s credit guarantee for SMEs falls into the category of public fiscal policy and is a kind of policy guarantee. To ensure the accomplishment of its goal, the government, as a fund contributor, exercises institutionalized management over the guarantee institutions and the use of their funds. The government departments conduct routine supervision and regular audit over the guarantee targets, underwriting requirements and procedures, commission rate, financial condition, performance and management of the policy guarantee institutions. In the United States, the SBA has a special team to examine the implementation of guarantee and loans and delivers a report to the Congress regularly. Japan''s Credit Guarantee Association submits an annual report to the minister in charge. If necessary, the minister will send people to launch on-the-spot inspection and punish those who deliver untrue reports and commit illegal activities.

d) Special taxation policies. Policy guarantee institutions are non-profit entities supported by financial capital. Their operational surplus, if any, is retained for the guarantee fund. So, they enjoy a special taxation policy, in other word, the government usually provide full or partial tax exemption for these institutions.

2. Characteristics of commercial guarantee institutions and their management

Commercial guarantee institutions are professional ones with an aim to earn profit. They have an extensive business scope. Offering guarantee to SMEs is only one of their business items. Commercial guarantee institutions are mainly organized in the forms of shareholding companies and limited liability companies.

The government exercises ABC or sectional administration over commercial guarantee institutions, with emphasis on how to protect creditors’ interests, standardize their establishment and ensure the liquidity and security of the assets under guaranteed. According to the US laws on guarantee and insurance companies, the Ministry of Finance is responsible for the administration of the guarantee and insurance industry. Before launching guarantee or insurance business, the applicant must submit articles of association and balance sheet. The ministry will decide whether to approve it on the basis of examination of such materials. The applicant's capital must be in terms of cash or its equivalent with good liquidity and value guarantee. All guarantee or insurance institutions must submit their monthly and annual balance sheet to the Ministry of Finance which is empowered to make investigation on these institutions from time to time. If they are believed to have lost their guarantee ability or violated the law, the ministry has the right to terminate their guarantee operation. When their guarantee reputation is found to be unreliable, the ministry can demand a third party to provide additional guarantee for them. At the same time, the American Act on SMEs also contains explicit provisions governing the settlement of disputes over guarantee and insurance operations.

3. Suggestions on formulating management rules for China''s guarantee institutions

Policy credit guarantee for SMEs is different from commercial guarantee. Firstly, the guarantee targets vary. Usually, policy credit guarantee has definite targets and concentrates financial support to those small enterprises that do not have enough collateral and therefore can hardly obtain bank loans and advances through normal channels. Secondly, they are of different nature. Policy guarantee is non-profitable, and the relevant charges are often subject to government control. On the contrary, commercial guarantee is profit-driven, usually free from government regulations in respect of their guarantee targets and charges.

At present, China''s guarantee institutions for SMEs exist in various structural forms with mixed operation of both policy and commercial guarantee. And it is necessary to mobilize various financial sectors to provide guarantee for SMEs. Therefore, ABC or systematic management should be exercised over the guarantee institutions in light of the different nature and operation of policy and commercial guarantee institutions.

a) Varied management items. Commercial guarantee institutions are placed under sectoral regulation. Access rules should be formulated for them to protect the interests of guarantee beneficiaries. The government focuses supervision and regulation on the credibility of the guarantee institutions in order to raise the liquidity and safety of their funds as well as the amount of capital funds and guarantee ratio. According to international practice, the government is responsible for the creditability of the guarantee institutions to which it contributed capital. Regarding administration over policy guarantee institutions, the government should specify distinctly their guarantee targets, commission rate, operational procedures, reporting and supervising system. At present, it is specially imperative to set forth qualification requirements of the employees in this sector.

b) To define the accounting system for guarantee institutions and to adopt proper taxation measures. With reference to the practice of insurance industry, the principle and procedure should be set forth for writing off loss in connection with guarantee, and the guarantee institutions be allowed to set aside a reserve fund from their pre-tax income. Of course, their special accounting system and taxation rules should be differentiated from the preferential taxation policy applied to them. The special accounting system is formulated for and is generally applicable to the whole guarantee industry, while tax allowance is designed only for guarantee in some special aspects, such as the guarantee for the creditability of SMEs. As some guarantee institutions engage in both policy guarantee and commercial guarantee, the preferential policy treatment should be allowed for eligible guarantee transactions rather than for guarantee institutions in general.

II. Establish a Credit Guarantee System for SMEs that Conforms to China’s National Condition

As China has its own state condition, we cannot indiscriminately copy the experience of other countries in building up a credit guarantee system for SMEs. We should draw on more successful experiences in introducing operational mechanism and take Chinese characteristics into full account in designing the system. It is a systematic project that requires many supporting systems and policy measures.

1. Select the mode of guarantee system within government fiscal capacity The Chinese government has limited and scattered revenues, and local disparities exist in the development of market and SMEs, so it hardly works to carry out a unified federal guarantee plan as in the United States. Therefore, China needs to set up multi-level credit guarantee funds for SMEs, with the core at local governments. The guarantee fund under the central government functions as guidance and supplement to those under local governments. There are numerous SMEs in various sectors which cannot solely rely on government allocations. Resources of the whole society must be brought into play, concretely speaking, encourage should be given to reciprocal guarantee among enterprises and guarantee for SMEs by various kinds of social foundations and commercial guarantee institutions. The government guarantee mainly plays an encouraging and guiding role, and offers sub-guarantee or re-guarantee to bear part of risks in unison.

2. Motivate the initiative of all sectors by institutional arrangements and incentive policies

At present, Chinese guarantee institutions for SMEs are organized in diverse forms. Different institutional arrangements should be made for different institutions of different natures.

(1) Strengthen institutional administration over government-funded policy guarantee institutions. Attention should be paid to the following major problems regarding policy credit guarantee offered by government-funded institutions: Firstly, the government should reduce administrative interference to the least extent. Guarantee institutions independent of the government should be set up to operate according to market rules. Whatever organizational forms are adopted, guarantee institutions should be regulated within the framework of corporate bodies in order to ensure their legal and standardized operations. The government will conduct institutional administration to prevent government leaders at various levels to directly interfere in guarantee decision-making. Secondly, hard budget constraint. The government as financial contributor must be responsible for the use of public funds. On the one hand, it should intensify financial constraint over the guarantee institutions with its capital contribution. Policy guarantee does not aim to make profit. On the basis of a given size of government capital, the government will ratify the scope and standard of revenue and expenditure of guarantee institutions as well as the government subsidy rate. The guarantee institutions should launch independent accounting practice and strike a balance between revenue and expenditure, with surplus, if any, to be transferred into the guarantee fund. On the other hand, a stringent administrative system and proper guarantee procedure must be formulated to clarify the responsibilities, rights and interests of guarantee institutions. They should be inspected and audited regularly.

(2) Institutions engaged in mixed business lines should set up separate accounts for policy guarantee and commercial guarantee.

Co-operation between the government and other funds or reliable professional organs is also a usual form of credit guarantee for SMEs. The advantage of this mode is that direct interference from the government can be prevented, effective play can be given to professionals, with their expertise being enriched and slips reduced. But mixed operations can hardly ensure the application of policy guarantee. So, the focus of establishing credit guarantee system is to avert the ethical risk. Commercial guarantee and policy guarantee transactions should be recorded on separate accounts so that the policy-driven funds can go where they should. At the same time, a line of distinction must be drawn between the responsibilities, rights and interests of government funds and other funds or commercial guarantee institutions. The government funding department needs to formulate a strict administrative system and guarantee procedure, to specify guarantee targets and commission standards as well as the responsibilities, rights and interests of the guarantee institutions with its capital, and its own duty to inspect and audit these institutions. In addition, competitive mechanism need be introduced to the selection of credible, professional and well performing institutions as agencies.

(3) Motivate the initiative of various sectors by means of incentive policies.

Tax allowance and re-guarantee policies can be pursued to encourage non-government institutions to offer credit guarantee to SMEs. They should enjoy tax preferential treatment according to their actual turnover and quality of guarantee transactions rather than their nature. Some commercial institutions are willing to launch guarantee business for SMEs. After ratified as eligible, those institutions that have underwritten guarantee business for SMEs can enjoy tax exemption. Tax refund practice may be applied to those whose guarantee performance has been verified as up to the requirement. Re-guarantee. The government may authorize qualified commercial institutions to offer credit guarantee of SMEs according to the rules, and policy guarantee institutions can offer re-guarantee in a certain proportion.

3. Build up a fund commutation system to maintain the continuation of guarantee funds for SMEs

Policy credit guarantee funded by the government is non-profitable. Its sustainability depends on two factors. One is standardized management to avoid decision-making risk, the other is continuous injection of funds to keep the size of the fund at a certain level. As credit guarantee is subject to a great number of laws, it obviously has the feature of economy of scale. At present, most of local governments input a one-time small amount of funds. There are dozens of million yuan in some cases, or ever only several million yuan. Too small a scale of the fund makes it hard for a guarantee institution to maintain payment balance, and this difficulty may compel it to engage in other business or set profiting as its goal. Therefore, guarantee funds backed by the government should reach a given scale and should not be too small in size or too scattered in many sectors. Since the government fiscal revenue is limited at various levels, financial support should be relatively concentrated on certain areas, and contributions can be obtained from diverse channels and their management be centralized by an authorized agency.

The performance of credit guarantee funds for SMEs is mainly judged by their contribution to the development of SMEs, to the increase of social benefits such as employment and revenue earning, and should not be evaluated in terms of value maintained and increased for the funds.

Whether the funds have made commutation or not should not be regarded as a criteria to appraise their performance. In this respect a set of performance evaluation indicators should be set up to evaluate the operation of policy guarantee funds for SMEs; an acceptable commutation ratio be stipulated; and additional capital be injected into them in light of their turnover. For instance, the annual outstandings of guaranteed loans to U.S. SMEs in the credit plan is more than 10 billion dollars, the commutation rate is about 15%, and government subsidy rate is around 2%. That means that the U.S. government has used 200 million dollars to stimulate 10 billion dollars of loans to SMEs. Developing SMEs is a long-term strategy. It is also a long-term task for the government to support the development of SMEs. Therefore, credit