Government officials in Zhejiang Province have designed a new pilot project to form microcredit lenders to provide small loans for small and medium-sized enterprises (SMEs) that have been affected by the credit crunch.

The provincial government in east China issued a directive on July 2, stating that each county could establish one or two microfinance firms that would be able to issue small loans in September after receiving the official go-ahead. The initiative came two months after the central bank and China Banking Regulatory Commission (CBRC) issued a joint directive declaring their support for microlenders.

In coastal Zhejiang, one of the country's main manufacturing bases, numerous SMEs have little access to mainstream banking services. Provincial officials started the microfinance pilot program last month to provide a cushion for SMEs.

The government will select the project's initiators from well-established private enterprises. The joint directive of the central bank and CBRC requires that these companies must have asset-liability ratios that are less than 70 percent, and they must have been in the black for three years in a row. They also must have posted profit of more than 15 million yuan ($2.2 million). Limited companies must have minimum registered capital of 5 million yuan ($732,000), and joint stock companies must have minimum registered capital of 10 million yuan ($1.46 million).

The small lenders are also required to ensure a diversity of loan receivers and are prohibited from accepting savings. Their financial resources should come from the entity's shareholders, donations, or capital from no more than two banking institutions. Most importantly, the microlenders will be allowed to charge 0.9 to four times the benchmark loan interest rate.

In the rest of the world, microfinance firms are considered social businesses that target small firms, rural households and self-employed businessmen. China is considered one of the last frontiers for microfinance. In 1993, it introduced a microlending process that was modeled on similar businesses in other countries as part of its measures to alleviate poverty. The country's first few microcredit firms appeared in 2005 in Shanxi Province. A year later, another seven microlenders had popped up in five other provinces and autonomous regions.

SMEs in a bind

Wu Jiaxi, head of the Zhejiang Small and Medium-sized Enterprises Bureau, told Xinhua News Agency that microlending programs would be instrumental in helping the province's SMEs fight off their current financial strains.

Since the beginning of this year, simmering inflation and the government's aggressive austerity measures have drained SMEs of their financial prosperity. Their financing difficulties stem from surging raw material prices and rising labor costs, Wu said. Stringent lending quotas imposed by the central bank have made it even harder for SMEs to get financing.

In the first four months of this year, the Zhejiang Provincial Branch of the Industrial and Commercial Bank of China distributed 1.3 billion yuan