To control the risks of China’s newborn microcredit companies, 　　banking regulatory departments should enact supervisory measures as soon as possible
　　
　　
　　ADJUSTMENTS NEEDED: World Bank experts exchange views with Chinese counterparts about microcredit companies
　　
　　For Lei Jinkui, the biggest fear for the future is a lack of experience and capital.
　　The board chairman of Rishengchang Co., a microcredit company in Pingyao County in Shanxi Province, Lei said his company limits the number of employees to nine to save operation costs.
　　Jinyuantai, a similar company in the county, only recruited five staff members: a vice executive manager, an accountant, a cashier and two clerks.
　　Its board chairman Han Shigong told Beijing Review that his company hired its operations staff from large financial institutions. His vice executive manager, rich in experience, was once the manager of a local state-owned bank.
　　Wen Qihua, deputy head of the county, said that in order to support the development of microcredit companies, the local government has helped train employees, who are sent to provincial or municipal state-owned banks for experience.
　　What is more important is that the local government applies more preferential tax policies and services to microcredit companies than to rural credit cooperatives, the main competitors of microcredit companies.
　　However, the central bank limits the business scope of these microcredit companies to providing loans. They’re not allowed to accept deposits from the general public. But, according to international practice, accepting deposits is one of prerequisites for sustainable development of microcredit institutions. If these companies are only allowed to provide loans, it’s difficult for them to exist for a long time. They have to bear great risks.
　　Experts suggest that, under the current situation, commercial banks and policy banks can provide wholesale loans to successful microcredit companies, or inject them with capital via the guarantee of state financing. When they operate regularly and conditions are mature, commercial microcredit companies should transform into banks and be able to finance within a larger scope.
　　“This policy gives us an opportunity. I hope to become a member of the financial system,” Lei said.
　　
　　
　　“I hope to become a member of the financial system.” --Lei Jinkui, Board Chairman of Rishengchang Co., a micro- credit company
　　
　　Wen said that these microcredit companies could first get a standard business license. After developing to a certain scale, they can apply for a financial business license. So, at present, the companies are referred to as “irregular financial institutions.”
　　Some say that China’s nongovernmental microcredit companies have a long way to go to become financial institutions under the market mechanism.
　　“Development of private-owned microcredit companies is not in an optimistic
　　situation, if they have no clear legal status,” said Zhang Xuechun, an economist with the Asian Development Bank.
　　In addition, according to Chinese regulations, microcredit companies mainly serve local rural areas, agricultural sector and farmers. “A business that is
　　concentrated within a region will carry a much higher risk. Agriculture depends on climate, among other things. If the region suffers an epidemic, large areas of agricultural produce in the region will be destroyed. Thus these companies will also suffer,” Zhang added.
　　“Now the problem is that the original intention of investors contradicts with the policy’s orientation. That is to say, according to regulations, loans to rural areas, the agricultural sector and farmers should bear a low interest rate, while microcredit companies aim to profit,” said Xing Yi, head of the Jinzhong Sub-branch of the People’s Bank of China. He said the government should deregulate microcredit companies in terms of their business scope, to create more room for them to profit.
　　Farmers in central and west China are poorer and have less assets. Thus microcredit companies in Pingyao have adopted the mode of joint household credit guarantee.
　　First, villagers select three to five people of good community standing and reputation to form a credit rating group. Next, villagers themselves launch credit groups with 10 households in each group, and select a head and a deputy. Whether a credit group can be set up depends on whether the credit rating group approves and whether villagers agree.
　　With regards to loaning procedures, generally only credit group members can apply for micro loans. If the loaned money isn’t paid back on time, other members in the group bear joint liability. Such a group is community governed.
　　A trial operation of this kind of credit guarantee model was launched in August 2005 in Jinzhong City, Shanxi Province, when the city implemented a loan policy for the unemployed. So far, the results aren’t bad, which is why the system is being introduced to Pingyao.
　　“Members of a credit group know each other. They voluntarily form a group. The model that ‘one person get loans and will be monitored by many others’ can tie creditable people together and exclude those with no credit,” said Xing.
　　However, Xing admitted, “Whether this method is applicable requires time to prove, and it should be adjusted while being practiced.”
　　Microcredit companies have few employees. To realize high-efficiency, low-cost operation, under the current system, the head or deputy head of a credit group is mainly responsible for reclaiming loans and interests. Microcredit companies will give certain economic allowances to these people.
　　However, World Bank experts investigating the situation in Pingyao take a cautious attitude to the model.
　　Jacob Yaron, an Israeli who used to be the Rural Financial Advisor in the World Bank’s Rural Development Department, said the joint household credit guarantee based on social responsibility can be feasible in some countries, but has failed in others.
　　Yaron said if he were an investor, he would be very cautious to invest in such microcredit companies. In rural areas, people are likely to say nice words about each other so that a good relationship can be formed. It’s undoubtedly a big credit risk.
　　So far, the China Banking Regulatory Commission hasn’t promulgated measures to supervise microcredit companies. Under this circumstance, risk control is under the total command of companies. But, as having inadequate time and experience, the two newly established microcredit companies in Pingyao haven’t developed a complete risk assessment system, and therefore financial troubles could hide somewhere.
　　Yi Xianrong, Director of the Institute of Finance and Banking under the Chinese Academy of Social Sciences, said that China’s financial supervisory institution should enact suitable supervisory rules as soon as possible. Business projects, and the scope and measures of microcredit companies, should be strictly supervised. Otherwise, many problems will appear before the trial operation finishes.
　　Robert Christen, a noted Chilean micro-finance expert, cautioned that the government can’t directly interfere with granting credit, but should create a good environment. The government should retreat from the front line of credit and become a backstage supporter.
　　Zhang Chenghui, Vice Director of the Financial Research Institute under the Development Research Center of State Council of China, along with World Bank experts, investigated Pingyao, where microcredit is in a trial stage.
　　When talking about the prospect of microcredit, she said, “It’s too early to comment. World Bank experts also think so.” But in her personal opinion, she added, “It may have a good future, as this trial wins full support of our government and enjoys some preferential policies, which were not enjoyed by former trials.”
　　Economist Zhang Xuechun said that, “To evaluate whether a financial institution succeeds or not needs at least three to five years. So, being newly hatched, commercial microcredit companies are incomplete in many aspects. I think we should be patient and tolerant.”
　　Zhang added that, according to her own experience, there is great possibility the trial may fail in the first year, and all involved should be mentally prepared in case that happens.

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