China, July, 29 2014 - Currently, some rural commercial banks, rural co-operative banks, rural banks, and urban commercial banks in China are offering microcredit products. Compared to the traditional credit products, microcredits target small businesses, self-employed entrepreneurs, and farmers who are at the lower end of the industrial chain and lack collateral and guarantor.

Opinions on Development of Financial Services to Farmer, Rural Areas, and Agricultural Production by the General Office of the State Council has proposed "accelerated promotion of microcredits in rural areas". Currently, some rural commercial banks, rural co-operative banks, rural banks, and urban commercial banks in China are offering microcredit products. Compared to the traditional credit products, microcredits target small businesses, self-employed entrepreneurs, and farmers who are at the lower end of the industrial chain and lack collateral and guarantor.

In China's vast rural areas, there are a large number of those businesses. How to provide proper financial services to them is of vital importance. It's medium and small-sized banks and financial institutions on one side, and small businesses, self-employed entrepreneurs, and farms bearing high risks on the other. How high is the cost of cooperation between banks and these businesses? How to protect against risks?

Differentiated competition

For rural commercial banks, rural banks, and some urban commercial banks, it's essential to avoid head-on competition with large commercial banks if they hope to achieve long-term development; instead, they should adopt "differentiated competition" mindset, complementing what large banks are lacking. Micro businesses, self-employed entrepreneurs, and farmers that large and medium-sized banks are not willing to cover and that are off great development potentials become the targeted clientele of the microcredit business of these medium and small-sized banking institutions.

However, business operation is more difficult than it seems. Most banks have always been strict about collaterals. Whether medium and small banking institutions would be able to run the microcredit business well depends very much on their product design and risk control ability.

Currently, some urban commercial banks like Baoshan Bank have established cooperation with Germany's IPC Company and imported its microcredit technology, determining whether to give out loans by analyzing the clients' willingness to pay back and their cash flow, thus solving the problem of the lacking of collateral.

"We have been digesting, absorbing, and improving the technology since we have imported it in 2005; now we have developed microcredit technologies that suit the actual conditions of China". According to Li Shanglin, salesperson of Baoshang Bank: the first thing is face-to-face meeting and cross examination credit investigation technology; the second thing is self-compiled reports and cash flow-based financial analysis technology; the third thing is loan decision-making technology that suits the characteristics of micro businesses' "short-term, small-amount, frequent, and urgent" loan requirements; the forth thing is installment repayment technology that suits the capital use of micro businesses; and the fifth is risk control technology that goes through the whole cycle of the loan.

As of the end of April, 2014, Baoshang Bank had released a total of 419,000 microcredit loans under its microcredit technology model, with loan balance of RMB 17.75 billion Yuan, providing legitimate credit service to 235,000 micro businesses, self-employed entrepreneurs, and farmers from different industries.

Besides Baoshang Bank, some other urban commercial banks, including Taizhou Bank, Jiaxing Bank, and Hubei Bank, have also introduced microcredit business. Among these, Taizhou Bank started its microcredit business rather earlier. In 2006, the bank started giving small-capital loans to the unemployed, farmers, and migrant workers; after the business became mature, the bank has expanded it to many other rural banks who have been launched many by Taizhou Bank.

Cost reduction

Huang Jinsong, employee of the Finance Bureau of Quanzhou City, Fujian Province, did a math: for banks, the workload of giving out RMB 100 million Yuan of loan is almost the same as that of RMB 1 million Yuan. "When a bank is facing regulation pressure generated by such factors as loan-to-deposit ratio and bad loans, its limited credit line will be inclined to be given to companies of better quality. Therefore, how to reduce operation cost has become the key for medium and small banks to provide good services to small and micro businesses", said Huang Jinsong.

Wang Miaolian, executive manager of the Marketing Center of the Microfinance Department of Baoshang Bank, said that, different from the door-to-door staffing cost of traditional microcredit business, Baoshang Bank develops its microcredit business in a bulk and intensive manner; it organizes extensively distributed clients through commerce and industrial associations and provides standardized and group service to clients of the same type, so as to improve business processing efficiency and make the best use of human resources.

According to the Zhejiang Division of China Banking Regulatory Commission's survey of banking financial institutions within its jurisdiction, currently Taizhou Bank, Jiaxing Bank, and Rural Credit Cooperative of Shandong, among others, are promoting the transformation of microcredit business from labor intensity to technology intensity, through such measures as "credit rebuilding" and promotion of "scoring card" technology.

Responding to the characteristics of microcredit funds as being small-amount, urgent, and frequent, at present, many medium and small banks are adopting simplified and flat credit loan procedure. For instance, for loans that are below certain amount the branch of a bank has the authority to approve and give them directly; also, improve the flexibility and frequency of the convening of loan-reviewing meeting, and change the traditional separation of credit extension and credit use into cyclic credit use once extended, effectively reducing the operation cost of microcredit.

Risk control

Risk control has always been a barrier to microcredit that can't be circumvented. From what the reporter has learned, many banks have the understanding that to prevent risk it's important to reduce reliance on collateral and attach more importance to cash flow and source of repayment.

According to Wang Miaolian, for its microcredit products, Baoshang Bank determines the risk index of each individual client through introducing the "cash flow culture" to control risk, establishing individual client credit risk identification, evaluation, and handling mechanism that are suitable for the survival and development environment of micro and small businesses, carrying out on-site financial and nonfinancial information, and cross examining monthly disposable income based on cash flow. For instance, to examine the authenticity of a client's sales figures by comparing the client's monthly electricity use and its monthly productivity.

Microcredit technology attaches more importance to the analysis of the primary repayment source. More specifically, to analyze such nonfinancial information as the business operator's moral quality, credit status, and family relations, so as to enhance risk control and reduce reliance on collateral.

Take Taizhou Bank as an example. In the bank's micro loan clientele structure, land-deprived farmers account for 95 percent and unemployed urban entrepreneurs 5 percent. "We discover that these clients generally have a strong will to repay, and they have some labor skills and posses rather good repayment ability", said a person from Taizhou Bank. According to statistics, as of the end of the first quarter of 2014, Taizhou Bank had given out 40,400 small-amount loans, with loan balance of RMB 5.153 billion Yuan, average loan of RMB 127,000 Yuan for each account, and bad loan rate of merely 0.28 percent.