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Jiang, R.; Ruan, J. Monetary Policy Affect Bank Credit Supply to Enterprises. Encyclopedia. Available online: https://encyclopedia.pub/entry/48147 (accessed on 04 July 2024).
Jiang R, Ruan J. Monetary Policy Affect Bank Credit Supply to Enterprises. Encyclopedia. Available at: https://encyclopedia.pub/entry/48147. Accessed July 04, 2024.
Jiang, Ruishi, Jia Ruan. "Monetary Policy Affect Bank Credit Supply to Enterprises" Encyclopedia, https://encyclopedia.pub/entry/48147 (accessed July 04, 2024).
Jiang, R., & Ruan, J. (2023, August 17). Monetary Policy Affect Bank Credit Supply to Enterprises. In Encyclopedia. https://encyclopedia.pub/entry/48147
Jiang, Ruishi and Jia Ruan. "Monetary Policy Affect Bank Credit Supply to Enterprises." Encyclopedia. Web. 17 August, 2023.
Monetary Policy Affect Bank Credit Supply to Enterprises
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This entry is adapted from the peer-reviewed paper 10.3390/su151511674

In order to develop the real economy and solve the problems of enterprise financing and lending, banks should increase their support for SMEs (small and medium-sized enterprises). The People’s Bank of China introduced two direct monetary policy tools in June 2020, which are important for alleviating the financing problems of SMEs, improving the construction of financial support for the real economy and promoting the recovery of economic development.

structural monetary policy supply of bank credit to SMEs sustainability of SMEs

1. Introduction

SMEs are an important vehicle for China to stabilize economic growth, promote innovative practices, increase employment and improve people’s livelihood. As of 2022, the number of private enterprises in China has grown to 47,011,000, and the share of private enterprises in the total number of enterprises has increased to 93.3%, contributing to more than 50% of China’s tax revenue and more than 60% of its GDP. Therefore, China attaches great importance to the development of SMEs and requires banks and other financial institutions to increase their support for SMEs to promote the recovery of the real economy. Data from the CBRC (China Banking Regulatory Commission) show that as of the end of 2022, the balance of loans used by banking financial institutions for SMEs was CNY 59.7 trillion, including CNY 23.6 trillion of loans for inclusive SMEs with a total single-account credit of CNY 10 million or less, with a year-on-year growth rate of 23.6%. The increase in bank loans for inclusive SMEs improved the availability of bank credit for SMEs, reduced operating costs for SMEs, and allowed SMEs to continue their operations. The supply of bank credit to SMEs cannot be separated from digital inclusive finance [1][2][3]. Banks and other financial institutions should invest more in digital transformation, accelerate digital transformation, and continuously improve the level of fintech application. Digital inclusive finance has become an important development direction for China’s financial economy in the new era, and it is an important contributor to the commercial sustainability of banks and the healthy and stable development of the economy [4][5].
Since 2020, China has used structural monetary policy tools to vigorously promote the development of inclusive finance in the banking sector by creating monetary policy measures such as the loan extension support tool for inclusive SMEs, the credit loan support program for inclusive SMEs and inclusive finance refinancing. The purposes of these policy tools are to encourage banks to strengthen the application of financial technology tools under the premise of commercial sustainability, strengthen loan risk prevention through digital inclusive finance, increase the allocation of loans for inclusive SMEs, promote commercial banks to accelerate the formation of a mechanism that dares to lend, can lend and will lend, alleviate the financing problems of SMEs, accelerate the digital transformation of banks, enhance the ability of banks and other financial institutions to serve SMEs, and promote finance in the new stage of development, serving the real economy better. The “direct access to the real economy” is targeted and efficient, which means that banks should shorten the transmission path of monetary policy and improve the efficiency of monetary policy transmission. The direct monetary policy tool is intended to supplement traditional bank-based monetary policy transmission to address the financing difficulties of SMEs, to leverage financial technology, to bring into play the effectiveness of digital inclusive finance, to improve the efficiency of monetary policy transmission, and to promote the resumption of work and digital transformation of SMEs.

2. Impact of Structural Monetary Policy Tools on the Supply of Credit to SMEs

The traditional monetary policy based on aggregate regulation cannot effectively solve the financing problems in key areas and weak links of the national economy. First, most of the funds released by the aggregate monetary policy flow to state-owned enterprises and the real estate industry, making it difficult for funds to flow to SMEs. Second, it is difficult for the aggregate monetary policy to reduce the financing costs of SMEs. Traditional monetary policy cannot effectively guide banks and other financial institutions in the investment of credit funds, and it does not support the supply of credit for SMEs. The structural monetary policy can effectively make up for the defects of traditional aggregate monetary policy, reduce the cost of enterprise financing, guide the flow of credit funds to downstream SMEs, promote the development of target enterprises, adjust the operating costs and credit structure of financial institutions, play a greater role in financing SMEs, and better achieve the goal of maximizing social welfare. To make up for the shortcomings of traditional monetary policy, the People’s Bank of China has innovated and implemented a series of structural monetary policy tools since 2013, such as targeted downgrades, small refinancing, rediscount guidance, standing lending facilities (SLF), targeted medium-term lending facilities (TMLF), and collateralized supplementary loans (PSL), to alleviate the financing difficulties of SMEs.
Among the many structural monetary policy tools in China, targeted downgrading is the most representative and the most studied one. The targeted downgrade policy is transmitted through the path of “central bank–commercial banks–targeted support enterprises” and mainly works on the real economy through the credit channel. Many scholars have conducted studies of the effects of the targeted downgrade policy. Targeted downgrading improves the availability of credit and reduces the financing cost of targeted support areas such as SMEs, which can better improve the financing situation of SMEs. Commercial banks adjust their credit supply structure to meet the proportion of credit allocation to SMEs required by the People’s Bank of China’s targeted downgrade in order to obtain the preferential policy of targeted downgrade, and the supply of credit funds to large and medium-sized enterprises decreases and the supply of credit funds to SMEs increases, which effectively enhances financial institutions’ preference for credit allocation to SMEs and motivates commercial banks to allocate more credit resources to SMEs [6], and the increase in the number of SME loans by commercial banks also has a spillover effect on the credit access of non-SMEs. The increased availability of loans to SMEs can significantly reduce their demand for commercial credit, resulting in a significant “financing constraint relief effect” and “investment stimulation effect”, which can promote the expansion of investment in SMEs by reducing their financing costs. Through the reciprocal symbiotic effect between enterprises, the development of SMEs can drive the growth of the output of large enterprises, and the implementation of preferential corporate income tax policies can produce a “1 + 1 > 2” superimposed universal benefit effect.
In the USA, the Federal Reserve’s Operation Twist (OT) and Term Loan Auction Facility (TAF) also influence the flow of funds through regulating interest rates. The Fed’s Operation Twist (OT) uses the open market to sell large amounts of treasuries and hold medium-term and long-term treasuries to lower long-term interest rates, direct liquidity toward long-term assets, increase long-term liquidity for financial institutions, improve the asset mix of commercial banks, and achieve a reduction in long-term financing costs for the real economy [7][8][9]. The US Term Loan Auction Facility (TAF) has an impact on Libor–OIS spreads, and the TAF can significantly alleviate liquidity pressures in the interbank market, easing the financing difficulties and expensive financing for the real economy [10].
As a typical direct monetary policy tool for the real economy, refinancing supports the resumption of work and production of SMEs that are less resilient to the COVID-19 pandemic. From the empirical study of the effect of the refinancing policy, under the reporting model of “lending before borrowing”, banks and other financial institutions first issue credit funds to SMEs that meet the policy requirements, and they then apply for refinancing funds from the People’s Bank of China in equal amounts, which directly increases the supply of credit to SMEs and reduces the interest rate of commercial banks for SMEs. This directly increases the supply of credit to SMEs, reduces the interest rate of loans issued by commercial banks to SMEs, and reduces the financing cost of SMEs. The small-scale refinancing promotes the increase in banks’ general micro and small loans, although there is an optimal size range of structural monetary policy instruments for small-scale refinancing. The structural monetary policy exemplified by targeted downgrades and refinancing has led to banks’ lending preference for SMEs, forming a positive incentive mechanism, increased credit allocation to SMEs, and targeted and precise guidance of capital flow to SMEs to alleviate their financing dilemmas, the transmission effect of which has been enhanced with the maturity of structural monetary policy.
In Britain, the ECBC and the Bank of Scotland also implemented a series of refinancing operations to boost the supply of corporate credit. The targeted long-term refinancing operations (TLTRO) of the ECBC have a significant targeting effect, with the TLTRO increasing the amount of credit to the real economy [11], improving the real economy and effectively contributing to growth of targeted lending, with limited spillover effects on non-targeted lending [12][13]. The increase in the number of targeted loans following the Bank of England’s Financing for Lending Scheme (FLS) drove commercial bank credit growth, effectively supporting the real economy [14]. The European People’s Bank of China’s long-term refinancing operations (VLTROs) had a positive economic impact on bank and real economy lending by extending bank debt maturities during the crisis period, with positive effects on lending to Spain, Italy and Portugal, among other countries [15][16][17], making a positive contribution to targeted corporate lending, which can effectively boost credit supply and reduce the risk of credit default.
Many scholars are skeptical about the effectiveness of the implementation of direct monetary policy. The Fed’s Operation Twist (OT) has a significant effect on the Treasury bill market but a diminished effect on the improvement of private sector credit. It cannot fundamentally reduce long-term interest rates and stimulate an increase in credit liquidity, and other financing channels are needed to reduce the cost of corporate finance [18]. The Fed’s Term Loan Auction Facility (TAF) has also not been effective in reducing spreads [19]. The ECBC’s Targeted Long-Term Refinancing Operation (TLTRO), which can stimulate fixed asset investment in large firms by reducing credit constraints, is difficult to be effective in the face of conditions such as poor corporate asset quality and insufficient collateral, and it does not have a significant effect on alleviating credit constraints for micro and small firms [20][21]. The European Central Bank’s long-term refinancing operations (VLTRO) have increased the credit risk of commercial banks, and the injected liquidity has led to an increase in the holdings of high-yield government bonds [15][22], which reduces the operational performance of banks and affects the supply of credit to the real economy [17][23]. The Bank of England’s Finance for Lending Scheme (FLS) had a non-significant effect on increasing the number of loans to SMEs, and the decline in the cost of financing in the credit market affected the effectiveness of the Bank’s policy to implement FLS [24].
In the current financial environment, there are still some problems in terms of the effectiveness and accuracy of direct monetary policy. The funds released under the influence of the policy cannot be guaranteed to flow to the target areas. The effect is greatly different from expectations. It does not promote the release of funds to SMEs; instead, it leads to the inflow of liquidity to non-target enterprises and cannot serve to alleviate the financing difficulties of SMEs. The operating mode and experience of major structural monetary policy tools such as financing-to-loan plans, targeted long-term refinancing operations, and fixed-term loan auctions in Europe and the United States are worth learning from. China should enrich the types of monetary policy tools and create new monetary policy tools. The economy stagnates in the short term due to the outbreak of the COVID-19 pandemic in 2020. The severe external macro environment has exacerbated the uncertainty of economic development. In China, the poor ability of SMEs to withstand risks and the deterioration of the economic liquidity environment have affected the operation of SMEs with capital shortage and financing difficulties, for which the People’s Bank of China created two direct monetary policy tools to help SMEs alleviate their financing difficulties.

3. The Impact of Digital Inclusive Finance on the Supply of Credit to SMEs

Digital inclusive finance is a new model of inclusive finance developed on the basis of digital technology. Through the organic integration of digital technology and inclusive finance, it can expand the reach of finance, break through the limitations of time and space, improve the quality of financial services, expand the scope of financial services, improve the coverage and accessibility of financial services, promote the efficiency of the real economy of financial services, and play an important role in improving the efficiency of financing for SMEs, broadening financing channels and reducing financing costs. It plays an important role for SMEs in improving the efficiency of financing, broadening financing channels and reducing financing costs. Digital inclusive finance continuously increases the breadth and depth of financial services with the help of digital technologies such as blockchain, big data and cloud computing; efficiently and accurately collects and mines multidimensional soft information such as account flow, dynamic revenue and historical transactions of SMEs [25]; improves information selection and risk identification [26]; and reduces information collection and processing costs, capital transaction costs and credit risk assessment costs, effectively resolving the information asymmetry between financial institutions and SMEs, and improving the availability of financing for SMEs [27][28]. The development of digital inclusive finance has improved SMEs’ access to credit resources from banks and other formal financial institutions, increased the scale of financing, and reduced the cost of financing, which to a certain extent alleviates the pressure on SMEs in terms of financing and expensive financing.
Little domestic literature has studied the practical impact of digital inclusive finance on the credit supply problem of SMEs. The existing domestic literature focuses on the role of digital inclusive finance in alleviating financing constraints [29][30][31][32][33], and the financing constraints play a mediating role in achieving digital inclusive finance for business innovation. By incorporating digital technology into all aspects of SME financing, digital inclusive finance effectively compensates for the shortcomings of traditional financial institutions, realizes the tripartite linkage between SMEs, banks and other financial institutions, and the government, and breaks the disadvantageous barriers facing SMEs in traditional financing. Digital inclusive finance can also lower the service threshold by providing diversified financial services, enhance the accessibility of services, reduce financing costs, ease the financing constraints of SMEs, promote technological innovation by opening up new financing channels, promote green innovation in enterprises, improve the level of innovation, reduce the leverage of SMEs, promote the improvement of the total factor productivity of SMEs, and enhance the value of enterprises in the long run. In regions with poorly developed banking and capital market sectors, digital inclusive finance can effectively alleviate the financing constraints of small-scale enterprises and high-tech enterprises. The alleviation effect of digital inclusive finance on enterprise financing constraints will rise with the increase in the CSR level.

4. Digital Inclusive Finance Affects the Transmission of Direct Monetary Policy

The transmission mechanism of structural monetary policy mainly works in three ways. First, the People’s Bank of China lends to banks that meet the policy requirements, targeting liquidity funds to specific areas, increasing the supply of low interest rate policy funds, lowering the cost of bank loans, and thus reducing the cost of financing for the real economy. Second, the People’s Bank of China reduces the legal reserve ratio through differentiated deposit reserves, increasing the amount of funds available for banks to lend, thereby increasing credit support to the real economy. Third, the People’s Bank of China, with the help of direct policy funding support signals, introduces incentive-compatible mechanisms to mobilize banks and guide them to adjust their credit structure and change their credit allocation decisions, thus promoting the expansion of credit allocation to the real economy.
Developing digital inclusive finance is an inevitable choice for banks’ sustainable development. Commercial banks have responded to the call of monetary policy and have vigorously developed inclusive finance to effectively alleviate the financing difficulties of SMEs and increase the effective supply of finance to real enterprises. In June 2020, the People’s Bank of China created the Inclusive SMEs Loan Deferred Principal and Interest Repayment Support Tool and Inclusive SMEs Credit Loan Support Program to provide preferential funding to incentivize banks and other financial institutions to provide a credit supply for SMEs. In order to better utilize the implementation effect of direct monetary policy, commercial banks undergo digital transformation, establish departments dedicated to serving SMEs, obtain more information on SMEs with the help of digital inclusive finance, develop financial products and services applicable to SMEs, and guarantee a credit supply to SMEs (Buchak et al., 2018) [34]. Commercial banks set up inclusive finance divisions and implement small and inclusive finance business assessment mechanisms, which can better respond to various national support policies for SMEs, increase credit rationing channels, better allocate various credit resources, reduce banks’ risk-taking, greatly improve the availability of credit for SMEs, and also provide an information platform for SMEs to obtain national support policies.

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