The Impact of Providing Loans to SMEs on Firm Performance in China

While small and medium enterprises (SMEs) represent a large segment of activity and employment, there has been little research on how their growth is affected by financial constraints. Indeed, because the credit needs of SMEs are too big for microfinance products, but that they lack the collateral to borrow from the traditional banking sector, SMEs are in some way the “missing middle” of credit constraint research. This project addresses this evidence gap by evaluating the impact of a new loan product, designed specifically for SMEs, on firm growth and other market outcomes.

In 2013, the researchers conducted a field experiment with 3,000 SMEs, to which they randomly gave information about the loan. Take-up for the informed group of firms was over 32%, compared to 5% for the non-informed firms. Indeed, the features of the loan - the absence of collateral requirement, geographically-concentrated clients and a lean cost structure – make it attractive to SMEs, while keeping lending costs down for the Rural Credit Cooperatives which offers the loan. On the basis of that experiment, the researchers are now conducting follow-up surveys with the firms to gather data on performance and other market outcomes. Looking at the change in firm investment and profits will shed light on the returns to the loan, that is, the extent to which the lack of financing options for SMEs is a barrier to growth. Further, the study will consider how access to the loan affects the likelihood of an SME entering the formal sector, and will examine the effect of one firm getting financed its competitors and on knowledge diffusion with the industry.

Policy implications 
Cai, J., Szeidl, A. (forthcoming). 'The Impact of Providing Loans to SMEs on Firm Performance in China'. Ongoing research.