Moody's: Securitization can help fund Chinese SME lenders and internet finance providers, a credit positive

Moody's Investors Service says that securitization of small and medium-sized enterprise (SME) and micro loans (collectively, small loans) -- a sector traditionally underserved by Chinese banks -- is credit positive, because it will diversify funding channels to SME and micro enterprises and pave the way for internet finance providers to grow into privately-owned commercial banks in China (Aa3 stable).

Ant Micro Loan (unrated) -- an affiliate of Alibaba Group Holding Limited (A1 stable) -- in December 2014 became one of the first small loan lenders approved by the China Insurance Regulatory Commission (CIRC) to issue asset-backed securities (ABS) backed by micro loans.

"The Ant Micro Loan deal highlights that securitization can help fund micro loan lenders' activities, and also be an important funding avenue for such groups with ambitions to grow their internet finance business and expand into wider banking services," says Georgina Lee, a Moody's Assistant Vice President and Research Writer.

"The China Banking Regulatory Commission (CBRC) has indicated that it is prepared to license more privately-owned commercial banks, stating it as a top priority for the year -- which could pave the way for securitization by internet banks and free up funding for the country's SME and micro enterprises sector," adds Lee.

Moody's conclusions are contained in its just-released report on China securitization, titled "Securitization Helps Fund Chinese SME Lenders and Internet Finance Providers, a Credit Positive ".

Moody's report notes that small loan lenders in China play a key role in financing new business start-ups and SMEs, but often face funding pressure because they have limited access to interbank funding that banks have and are restricted in their funding sources.

The clients of small loan lenders, the SMEs and micro enterprises, are often not the targeted borrower-clients of commercial banks. Commercial banks have traditionally favored lending to large state-owned enterprises, because they view them as having a lower risk profile than SMEs and micro enterprises.

However, the SME and micro enterprises sector is a key driver of China's economic growth, accounting for 65% of GDP growth, 50% of total tax revenue and 75% of employment in 2014.

Meanwhile, as an alternative to securitization, some small loan lenders in China have raised funds through so-called quasi-securitization schemes, where loan assets are packaged and sold on peer-to-peer websites.

However, these schemes are not subject to the same regulatory oversight as securitization transactions and do not offer the same structural protection to investors, says Moody's.

Securitization, on the other hand, offers a better protection to investors through a more standardized and regulated product. Securitization can also help improve disclosure by and market scrutiny of SMEs' accounting standards.

The use of securitization to fund SME lending comes at a time when China's GDP growth trajectory has slowed, and the government has placed greater priority on facilitating private sector development and innovative entrepreneurship to spur new growth momentum.

Subscribers can access the report at http://www.moodys.com/viewresearchdoc.aspx?docid=PBS_1003858