(Yicai Global) March 22 -- China's financial authorities in eastern Zhejiang province have released guidance for liability exemption for banks to encourage them to offer loans to small and micro firms.

"As small and micro firms face difficulties in borrowing money, we have formulated guidance for exempting liability if duties are performed in consideration of the situation of the province," said Bao Zhuming, secretary of the party committee for China Banking and Insurance Regulatory Commission's Zhejiang branch, at a press conference yesterday.

Zhejiang province has basically established mechanisms for liability exemption for granting credits to private companies and small and micro firms if duties are performed, Bao said. The mechanism is generally operating well while the number of those gaining exemption from liability is increasing annually.

The regulator is also improving standards for determining liability and supporting systems continuously, he added.

Banks will hold lending officers accountable if risks occur related to the loans based on their appraisal system. Banks lack the incentives to loan money to small and micro firms since they are more vulnerable to risks compared with large companies. The mechanism means banks will exempt the loan officer's liability as long as they do what they are supposed to do before lending occurs even if uncontrollable risks occurred later.

The local regulator has urged banks to introduce more detailed implementation rules. Setting up a unified definition of "fulfilling duties" is hard when commercial lenders set out detailed terms for the mechanism. Confusion easily emerges at an operational level and disputes can also occur since exemption clauses issued by some banks are quite long, Bao said.

The CBIRC will also guide banks to use scientific and technical means such as big data and artificial intelligence to address the high costs of information management and difficulties in risk management faced by private companies and small and micro firms. It has also proposed specific measures and boosted supervision and coordination to help banks implement the mechanism.

Unlike traditional solutions that require a bonding company to take all of the risks, Zhejiang implements a tool, where bonding firms and commercial lenders share risks related to loan guarantees for small and micro firms, Bao said. The mechanism requires the bank to take 20 percent or 30 percent of risks, while the bonding company takes the rest.

The participation of large banks will impact small and medium lenders' loan business targeting small and micro firms, Bao said. Some regional banks have lost high-quality customers since the introduction of larger lenders due to their relatively low rates. However, Bao said this is normal and reflects the market economy.

Editor: William Clegg