Publication Type

PhD Dissertation

Version

publishedVersion

Publication Date

9-2019

Abstract

In China, the financing problem of SMEs has been concerned for a long time, but it has not been effectively solved. At present, the development of financing guarantee companies (FGCs) providing credit enhancement services for SMEs is facing severe challenges. Essentially, financing guarantee is a special kind of creditor’s right (debt investor’s rights). The essence of creditor's right is the seller position of put options. Because the return-risk structure of creditor's right is seriously asymmetric, debt investors should follow the prudent and conservative operating principle. The "5Ws" principle or "5Cs" principle of bank loan business is the embodiment of this prudent and conservative principle. When selecting investee, debt security (bond) investors should follow the strict "exclusion-rejection" procedure, which is the direct requirement of the prudent and conservative principle in debt investment. Financing guarantee can be regarded as a non-standard debt security. Because of the higher risk of its clients of SMEs, the strictest principle of prudence and conservatism must be abided by in the operation of financing guarantee business, namely the zero-loss-principle. As a credit risk management instrument, financing guarantee has both links and differences with credit default swaps (CDS) and credit insurance. The essential difference is that financing guarantee must follow the zero-loss-principle, while CDS and credit insurance follow the principle of "expected loss less than expected return".

There is a match between the zero-loss-principle of credit enhancement business and the spirit of doer. The zero-loss-principle requires the FGC to strictly examine and screen the clients (entrepreneurs) and select the right clients at the very beginning. The spirit of doer usually refers to a dedicated character that takes the enterprising philosophy of " If others succeed by exerting one ounce of effort, I will exert a hundred times as much effort" as the core and seeks the right thing as practical, deep, long-term, capable and excellent as possible. The spirit of doer can increase enterprise value and reduce credit risk of financing guarantee business through learning curve effect, human capital effect and social capital effect. Through case study, it is found that the actual controllers who are not focused on the business must be excluded directly when scrutinizing the applicants. Because opportunists are highly likely to fail in business, and once their business fails, the possibility of the FGC to fully exercise its right of recourse after compensation is very low. Even before default, these opportunists have various countermeasures against recourse or claims.

There is a match between the zero-loss-principle of credit enhancement business and market competitiveness. Market competitiveness can improve the profitability, solvency and sustainability of enterprises. Enterprises with market competitiveness can improve EBITDA by raising prices or expanding sales, which can improve the short-term solvency of enterprises and reduce the risk of financing guarantee business. Through case study, it is found that the enterprise market competitiveness can be measured objectively and quickly by using two indicators of customer concentration and net profit margin of sales.

There is a match between the zero-loss-principle of credit enhancement business and technical suitability. Technology is a means of transforming input into output in the process of production, and technological suitability is the organic unity of technological advancement and efficiency. The principles and methods of technology suitability evaluation are completely consistent with those of enterprise value evaluation, that is, to maximize the net present value or the internal rate of return. Through case study, it is found that the degree of technical suitability can be grasped quickly by two indicators of return on assets (ROA) and average wage.

With the zero-loss-principle of financing guarantee business as the core, there is an organic unity among doer spirit, market competitiveness and technical suitability. Among them, the spirit of doer is the commander-in-chief, technical suitability is the means, and market competitiveness is the driving force and guidance. The three-factor credit enhancement model can explain the ups and downs of China's financing guarantee industry, and can also guide the FGCs to manage each financing guarantee business.

Keywords

Financing Guarantee Company (FGC), Zero-loss-principle, Doer Spirit, Market Competitiveness, Technical Suitability

Degree Awarded

Doctor of Business Admin

Discipline

Finance and Financial Management

Supervisor(s)

BHATTACHARYA, Shantanu Hiralal

Publisher

Singapore Management University

City or Country

Singapore

Copyright Owner and License

Author

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