Microcredit Lending in China May Soon Benefit From Key Policy Changes
It has been eight years since China launched its microcredit pilot project. Since that time, it is abundantly clear that microcredit lending has proven to be one of our nation’s most vital financial tools in supporting our economy, particularly the small to medium sized enterprises (SMEs) that account for 60% of China’s gross domestic product (GDP).
The purpose of the introduction of microcredit in China was to serve the needs of these SMEs, as well as the farmers, agri-businesses and micro-sized enterprises that historically had difficulties in accessing traditional bank loans. And progress has been rapid: As of the end of September, 2013, there were nearly 8,000 microcredit companies with a total of approximately RMB 800 billion outstanding loans in China, evidencing the remarkable progress achieved by microcredit companies.
Despite this achievement, however, microcredit companies have been somewhat restricted in their ability to grow. Under existing regulation, Guidelines on the Establishment of a Microcredit Company (CBRC 2008, File 23), a microcredit company can only borrow up to 50% of its registered capital and can do so only from two banking institutions. Also, according to a policy issued by the Financial Bureau in Jiangsu Province, the maximum capital a microcredit company is allowed to access from its shareholders and other approved individuals and/or entities should not exceed 50% of its registered capital. These policies, which are recently being viewed by many in the microcredit and government sectors as overly conservative, make it difficult for microcredit companies to rapidly expand their credit operation. As such, they may in the near future be relaxed and adjusted, either through securitization of the portfolio, issuance of bonds, and/or permitting an increase in the multiple of leverage to registered capital -- subject, of course, to standards such as limiting problematic loans to less than 5% of the total portfolio and other standards.
In addition, we may see a relaxing of the law restrictingmicrocredit companies’ operations to only the region in which they are located. Allowing them to expand to adjacent areas, perhaps through mergers and acquisitions, can be an efficient way for them to diversify their customer bases and greatly reduce the risk associated with doing business in a single area.
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