Microcredits boost rural financing in China
Wednesday, July 30, 2014
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?
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.