Credit by Algorithm

By+Deng+Yaqing

Capital shortages have been a constant source of worry in recent years for Zhao Xiaopei， a paint-processing entrepreneur in Ye County， central Chinas Henan Province. “Only when you start a business can you truly understand how difficult it is to survive without sufficient funds，” said Zhao， who mortgaged his house to borrow 10 million yuan （$1.57 million） from a bank as startup capital in 2008.

As his business grows， the loans he requires have also mounted up， and securing the banks approval for them is becoming more and more difficult. “These days， private lending agencies are our first choice because we can get our loans quickly and with a minimum of red tape，” said Zhao. However， borrowing from private lenders also means incurring higher borrowing costs， exposure to more disputes arising from nonstandard procedures and more risks to his corporate reputation.

At present， small and medium-sized enterprises （SMEs） contribute over 60 percent to the countrys GDP， over 50 percent to tax revenue and 80 percent to urban employment， according to statistics from the Ministry of Industry and Information Technology. Compared with large state-owned enterprises， they face higher thresholds and more barriers when applying for bank loans. However， that all may be about to change.

A Beijing-based credit information service company 3 Golden Information Technology Co. Ltd. （3 Golden） has offered fresh hope to cashstrapped SMEs. So far， it has helped more than 1，000 such enterprises to access over 6 billion yuan （$942 million） in collateral-free loans from commercial banks and assisted banks in the loan risk management of over 50 million yuan（$7.85 million）， with a staggering zero nonperforming loan rate.

“In China， one can almost think of a bank as a pawnshop， because every loan has to be secured with something of value，” said Fan Xiaoxin， CEO of 3 Golden， a man committed to converting the potential value of good corporate credit into real capital resources and creating a credit appraisal and investigation platform for companies.

Majoring in computer engineering， Fan started his career creating and operating a supply chain management information system for large automobile manufacturers. Inspired by one of his classmates， a member of financial elite who worked on Wall Street for years， Fan and his team tried to incorporate statistical analysis of gargantuan amounts of information， also known as “big data，” with financing. Specifically， they began to appraise the credit worthiness of the SMEs he served by analyzing the supply chain data his company collected. Then， they helped qualified SMEs obtain collateral-free loans by virtue of their good credit standing.

It was a process that required courage， perseverance and steady progress. After three years of lobbying bank executives and perfecting its big data credit assessment model， 3 Golden finally scored its first collateral-free loan in 2010. Now， the company has established business cooperative relations with most joint stock banks in China， including China Minsheng Banking Corp. Ltd.， Guangdong Development Bank and Ping An Bank Co. Ltd.

Serving SMEs

Corporate credit assessment relies on data analysis， but where does this data come from？ It is primarily collected by a type of“cloud robot” which assists itself in its own development. If a SME intends to get bank loans with the help of 3 Golden， it has to allow a cloud robot to be inserted into its supply chain management system. In this way， data encompassing 12 links including orders， production， logistics， delivery， invoice verification， and payment will be analyzed through cloud computing. It only takes a few minutes for the self-developed objective credit assessment model to produce a credit evaluation report. Then， banks will be able to decide quickly whether or not to lend money to a company after perusing its credit report.

“Just like in a persons medical exam， the operational situation of SMEs will be assessed by more than 2，000 indicators. These indicators have been developed and repeatedly tested by mathematical experts and can secure an accuracy of over 99.9 percent，”said Fan， who believes the data for companies bears comparison to genes in the human genome. For instance， one can infer from the data concerning corporate supply chains indicate that the higher the quality of a companys products， the more efficient its operating conditions.

Aside from settling financing problems for SMEs， 3 Golden can significantly reduce financial risks for banks. A major reason behind banks reluctance to serve SMEs is that they cant accurately monitor companies operational conditions and reduce the risk of bad loans. To eliminate such worries， 3 Golden has realized real-time monitoring of companies operational conditions and can raise risk alarms to banks before something comes up.

“The bankruptcy of a company is a long process. Because 3 Golden provides a real-time analysis of its supply chain data， banks can call in or reduce the loan they issue to the company before other lenders realize somethings wrong，” said Fan.

While data analysis is very important in the decision-making process， 3 Golden needs to make sure all the data are precise and true. The data collected by cloud robots comes from the supply chain management system for companies， which resembles the transaction system of national bankcard association UnionPay and cant be changed. Small companies that dont have their related data recorded by a supply chain management system have to submit their data by filling out a series of forms， which will undergo data integrity tests and a data cleaning process. “Beyond all that， the complexity of cloud computing has determined that companies dont even know how they can get a higher score by changing a single or a set of data，” said Fan.

In short， the clients 3 Golden serves primarily include SMEs who get bank loans and financial institutions that need to find reliable new borrowers while keeping an eye on the operating conditions of its existing customers. That is to say， the company mainly subsists on the commissions paid by companies and banks. In addition， it has also established a social credit system by comprehensively checking companies in a certain industry or region.

“The risk quantization method should be widely promoted and spread. When more financial institutions can measure and manage risks in this way， it will increase the stability of the financial market，” said Fan， noting that big data help banks reinforce their capability to rein in errant borrowers.

Credit system needed

At an executive meeting of the State Council held in July 2014， Premier Li Keqiang pointed out the efforts should be made in creating a market environment of fair competition and making credit the true “cornerstone” of the market economy. However， it points no easy task.

In the United States， collateral-free loans make up more than 80 percent of bank lending， while in China， the rate was almost zero when Fan first started his business in 2007. Chinese financial institutions emphasize the transfer of risks， while their Western counterparts value controlling risks.

Of course， the divergence derives from the difference in status between credit systems of China and the West. In the United States， there are four major credit systems that interact with each other—business credit， individual credit， government credit and justice credit. While the default cost for companies are significantly higher there than that in China， they can also get loans purely by virtue of their good credit record. In stark contrast， due to the underdeveloped credit system in China， most SMEs barely manage to have their credit appreciated and get collateral-free loans with an impeccable credit record， though the Central Government called on state-owned commercial banks to brace up the real economy by issuing loans to SMEs on more than one occasion.

“Chinese companies also have their own credit， but they cant be checked by banks at this current stage，” said Fan. Now， China has no corporate credit investigation platform， which is essential to the government， banks and individuals. For example， with the platform in place， a job seeker would be able to check the credit status of a company before going for an interview.

“To effectively manage financial risks and establish an efficient public credit system， the government needs to leave more data open to the public，” said Fan， suggesting that conducting a credit investigation is even more important than examining credit ratings.

“As Chinas economy continues to advance and the Internet becomes increasingly popular， this densely populated country should try to make full use of its abundant store of data to push forward economic and social progress，”said Fan.