“As soon as I think about it, I can’t sleep at night,” said Cai, who has already put up his own property as collateral.

Cai has found himself in a position that is becoming all too familiar to scores of other cash-strapped small businesses in China.

The People’s Bank of China (PBOC) has shovelled huge amounts of funding to smaller banks to increase lending to small businesses since the outbreak began, but the efforts are facing major obstacles because of the incentives built into the banking system and problems the virus has already created among small borrowers.

The results suggest the recovery of small and medium-sized businesses – which employ about 80 per cent of Chinese – from months of lockdowns is far behind larger industrial firms.

The central bank also adjusted down the interest rate on the one-year medium-term lending facility – the preference rate at which the central bank lends to financial institutions – to 2.95 per cent, the lowest level since the liquidity tool was introduced in September 2014, to bring down overall borrowing costs.

Policymakers hope this will open up vital lines of credit for the private sector and the rural economy, but in practise China’s smaller banks have not always followed the central government’s wishes.

“Small companies are only able to find private lenders [willing to loan them money]. It is impossible for regular banks to approve their applications,” said a department manager of a local commercial bank branch in Foshan, Guangdong province.

“Because of the pandemic, Beijing has continuously urged local banks to increase their lending and lower [loan approval] thresholds for small enterprises, but local banks have their reasons for not complying,” said the manager, who spoke on condition of anonymity.

Among their concerns are that SMEs do not have much property for collateral and loan defaults would increase bad assets at the bank and affect a manager’s performance rating.

“What kind of loan manager would want to take such a risk?” the manager said. “We can loan to those local star enterprises with good relationships with local governments, like hi-tech or epidemic prevention producers – these loans not only guarantee the security of the bank’s funds, but also contribute to the local government’s needs.”

The interest rate for a one-year loan at a regular bank is about 4.35 per cent, while private lenders, or so-called shadow banks, charge between 24 per cent to 36 per cent.

“If a small firm wants to borrow 2 million yuan for about two days to bridge a loan, we will charge at least 1 per cent or 20,000 yuan (US$2,800) as interest,” said a small Guangzhou-based shadow banker who declined to be identified.

“There have been a growing number of SMEs looking for cash from our private lending companies this year, but we have kept the same level of interest as last year, about 2 per cent a month.”

Now, economic risks associated with the coronavirus have exacerbated the cash crunch.

“These businesses were already struck by the crackdown on shadow lending, which they depended on heavily for loans outside the banks, and then took by a second hit from the trade war [between China and the US],” said Andrew Collier, managing director at Orient Capital Research.

“However, no matter how much money floods the banks, getting it to smaller customers is going to be slow going because many banks – particularly the larger ones – are not geared up to find SME borrowers and assess their credit risks.”

Tight funding is one of the biggest problems facing small firms in China, according to a survey of 6,422 companies conducted in February by the China Association of Small and Medium Enterprises.

Nearly 90 per cent of the companies surveyed said that they only had enough cash to last for up to three months, with fewer than 10 per cent saying they had enough funds to last for six months.

Rory Green, China economist at TS Lombard, said that support from the PBOC may not be enough for as many as 5 per cent to 10 per cent of small firms.

“For many SMEs, particularly those in the consumer service sector, Lunar New Year is their most important revenue generating period,” he said, adding companies typically borrowed to increase inventory and pay bonuses ahead of the holiday.

“Evidently this year, little to no revenue was generated in February and March, leaving firms’ balance sheets incredibly stretched.”

Concerns over the health of small banks in China were rising before the coronavirus outbreak.

Following the global financial crisis in 2008-09, when China flooded the banking system with easy credit, many smaller banks began lending liberally to local governments and businesses. A large portion of those funds ended up in risky real estate ventures, rather than local businesses.

The government then partially bailed out Hengfeng Bank and Bank of Jinzhou, the latter of which received a 12.09 billion yuan (US$1.7 billion) lifeline, with the central bank and the Liaoning provincial government becoming its two largest shareholders, according to a filing with the Hong Kong stock exchange, where the bank is listed.

Meanwhile, shares of the Hong Kong-listed Bank of Gansu plunged this month after the lender released poor earnings results.

The bank’s net profit tumbled by 85.1 per cent from 3.44 billion yuan in 2018 to just 511.3 million yuan in 2019 because of “increased provisions for credit impairment loss as a result of the declined asset quality”, according to a filing with the Hong Kong stock exchange last month.

Local media have reported bank runs at some branches of Bank of Gansu in the mainland after speculation it was short of cash. The bank has since said its operations were “normal” and attributed the fall in its share price to “market behaviour”, adding there would be no impact on deposits at the bank, according to a report by Caixin. 

Bank of Gansu, which saw its non-performing loan ratio rise to 2.45 per cent in 2019 from 2.29 per cent in 2018, said it could not estimate the impact of the coronavirus outbreak on its credit and investment assets.

“[Small banks] have very weak balance sheets and a high default risk at the best of times. Even if banks can access cheap PBOC funding they would rather not lend to SMEs and have to deal with non-performing loans in six months’ time,” said Green at TS Lombard.

Investment bank Nomura said that Beijing had been “behind the curve” in offering financial relief for businesses and households that have suffered from the outbreak and expected more support to come.

“In our view, small to medium-sized banks could be severely hit by the Covid-19 pandemic as many, if not most, of their debtors are already very likely to be experiencing financial difficulties,” said Nomura in a note published last month.