current situation and future prospect of micro credit in china

8/6/2019 Current Situation and Future Prospect of Micro Credit in China

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Current Situation and Future

Prospect of Microcredit inChina

Prof. Du Xiaoshan

Rural Development Institute

Chinese Academy of Social Sciences (CASS)

Email: [email protected]

World Microfinance Forum Geneva,

October 1-2, 2008


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I. Microcredit Operations Conducted by

Various Institutions

The microcredit suppliers in China can be categorizedinto the following eleven types:

NGO MFIs for Public Interest;

Subsidized Microcredit Projects for PovertyAlleviation Developed by State-owned Banks such asthe Agricultural Bank of China (ABC) and theAgricultural Development Bank of China (ADBC);

Rural Credit Cooperative (RCC) Farmers Microcredit

Project; Microcredit Project Implemented by Urban

Commercial Banks and Guarantee Companies;


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I. Microcredit Operations Conducted by

Various Institutions

Credit-only Microcredit Companies (MCC) (the Peoples Bank

of China (PBC) Pilot Project);

Village Banks (CBRC Pilot Project);

Rural Mutual Credit Cooperatives (RMCC) (CBRC Pilot Project);

Lending Companies of Commercial Banks (CBRC Pilot Project);

Subsidized Microcredit Project for Poverty Alleviation

Conducted by Rural Financial Institutions;

China Postal Savings Bank (CPSB) Microcredit Pilot Project;

Commercial Bank Microcredit Pilot Project.


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II. Future Prospect of Microcredit

1. RCCs

If considering farming household loans asmicrocredit, it is estimated that RCCs servemore than 70 million or 90 million farming

households, accounting for 30% of overallfarming households in the country.

It is likely to envisage the littlemomentum for further growth or evencontraction of microcredit business withoutthe adjustment of corresponding policies andregulations in the near future.


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2. ABCThe ABC has decided to issue JinhuiFarming-Benefited Card with farmermicrocredit as its core business so as toalleviate farmers difficulties in getting loans.

demonstrating that ABC has a strong desire tochange its mindset, and attempt to make fulluse of modern technological means, such asmobile banking, to solve farmers difficulties in

borrowing from banks. Nevertheless, the mostsignificant risk is likely to be how to avoidmoral hazard of borrowers and guaranteenormal collection of loans so that historical

mistakes can be effectively prevented.


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3. CPSBthe balance of loans with each loanbelow 100,000 Yuan on average will amount

to 80 billion Yuan within three years, and the

balance of loans with each loan below 1million Yuan will reach 600 billion Yuan within

five years, accounting for 30% of total loans

outstanding. The risk and challenge faced by

CPSB for further development at present and

in the future is lack of talented personnel,

relevant experience, and risk control capability

in operating financial businesses.


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II. Future Prospect of Microcredit4. Shareholding Commercial BanksBased on the

situation of microcredit businesses operated byshareholding commercial banks, they can becategorized into two kinds. The first displays thesituation of majority of banks which havent paidenough attention to their microcredit operations,and those banks need to confirm their willingnessand then develop relevant skills so that microcreditcan be expanded into a large scale.

The second can be represented by such leading

pioneers as Baotou Commercial Bank and HarbinBank. With their continuous exploration andexpansion, they must keep their minds alert, learnfrom experiences and improve their operation andmanagement capacities, preventing the risk ofrunning too fast.


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5. MCC: It is shown that such type ofMCCs may be one of MFIs with thefastest speed of growth in thecoming two or three years in China.Currently, the attention should bepaid not only to vigorous promotion

but to risk prevention. Operationalrisk and moral hazard are probablykey risks for major concern.


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6.RMCC: it comes to a conclusion that theprospect is not optimistic in the near futurefor RMCCs to achieve relatively fast, extensive,healthy, and sustainable development. But

there still exist passion and potential forfurther development if government policiescan be more favorable in developing RMCCs.Under such circumstance, the probable risks

lie in poor and unsustainable operations orother problems such as illegal depositmobilization and fund raising as well asfinancial order disturbance, etc.


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7. Social Organizations or NGO MFIs:Social organizations and NGO MFIs donthave much space to reach a large scaleunless favored by policy changes.Nevertheless, if they can successfully betransferred to MCCs or even banks with agood management after going through a

long and painful process, they willultimately enjoy a rapid expansion andgrowth, especially those located inprovinces.


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III. Improvements in Relevant Policies and

Regulations for Further Discussion

1. The territory limitation puts on the operations of village banksand MCCs.

A proper adjustment for this policy needs to make. Forexample, when these institutions reach certain standardsafter two to three years normal operation, they can expand

their businesses to adjacent areas.

2. The financing limitation is set for credit-only MCCs.

According to the existing regulations, any credit-only MCC canonly mobilize wholesale loans with the value up to 0.5 timesits registered capital from two banking institutions, which isan over-conservative policy that needs to be adjusted. Forinstance, the proportion of financing can be enlarged from 0.5to 4 times step by step, and even larger depending on thecircumstances.


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3. It is unreasonable to cap the interest rate of RCCs microcreditat 0.9 to 2.3 times the basic rate. As compared to theprovision for other organizations engaging in microcreditwhose interest rate can be four times the basic rate, it is alsounfair for RCCs.

4. The government should issue some policies and regulationsfor public-interest MFIs with pursuit of sustainability whichcan at present be defined as those organizations with the loanbalance of each client less than 50,000 Yuan. Public-interestMFIs deserve an appropriate legal status, and the support ofwholesale funds as well as favorable policies for them tostrengthen their quality and capacities.


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III. Improvements in Relevant Policies

and Regulations for Further Discussion

5. If the Ordinance of Lenders can beissued, it will be regarded as a greatregulation to legalize non-depositoryinformal credit practices as well as topromote further development of

microcredit.


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6. The market should be open to foreign capital and technology.

Now in accordance with the government policies andregulations on microfinance, all kinds of microfinance ormicrocredit institutions can only operate within countieswhere they are located, which presents a restriction ondomestic and international investment in general andcommercial capital inflow in particular because of investmentcost increase and profit margin decline even though suchprovision is conducive to risk control from the perspective of

regulators.A realistic risk will be that foreign institutions are unable

to adapt themselves to local surrounding and achievesuccessful localization. Moreover, there are no many investorsthat show their true willingness to serve low segment.


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7. Supporting organizational system at meso level needs to bebuilt up.

Besides developing diversified retail microcredit agencies

mentioned above, various supporting organizational systemsare required to be formed so as to support those retailagencies in favor of their healthy development, which includewholesale funds, credit bureau, external auditing companies,rating agencies, consulting companies, training agencies,guild/association or network, and so forth.

8. It is a question worth consideration that Chinas governmentshould play a role in creating a enabling policy environmentfor microfinance services or in directly taking part in offeringcredit services.


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Thank You!

current situation and future prospect of micro credit in china

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