Microfinance Industry in China

In May 2008, the CBRC and the PBOC jointly promulgated the Guiding Opinions, which sets out the fundamental requirements for establishing, registering and operating a microfinance companies at the national level. This was a significant step in advancing the industry and led to a rapid increase in government registered microfinance companies in China. In addition, through issuing The Guidance on Financial Support for Adjustment and Transformation and Upgrade on Economic Structure (关于金融支持经济结构调整和转型升级的指导意见) in July 2013, the PRC Government increased its support in the microfinance industry and provided guidance on the diversification of customer segments, as well as access to funding at a lower cost.

The number of government registered microfinance companies in China grew substantially from 4,282 as at 31 December 2011 to 8,673 as at 31 December 2016, representing a CAGR of about 15.2%. As at 31 December 2016, there were 8,673 registered microfinance companies in China. It is forecasted that this will continue to increase and reach 10,180 government registered microfinance companies in 2020. The total registered capital in the microfinance industry in China amounted to CNY 823.4 billion as at 31 December 2016. In addition, the total amount of outstanding loans granted by all the services providers in the microfinance industry increased from CNY 391.5 billion in 2011 to CNY 927.3 billion in 2016, representing a CAGR of 18.8%. The total amount of outstanding loans granted by microfinance companies represented 0.7% of the total principal amount of outstanding loans granted in China in 2011, and increased to 0.9% in 2016.

The rapid expansion of the microfinance industry in China is due to the increased demand for microfinance services from SMEs, microenterprises and individual proprietors. Due to favorable government policies under the 12th Five-Year Plan and the overall macroeconomic development of China, the number of SMEs and microenterprises increased from 49.9 million in 2011 to 74.9 million in 2015, representing a CAGR of approximately 10.7%.

Despite their increase in numbers and significance in China’s economy, SMEs, microenterprises and individual proprietors remain underserved by banks. Banks are reluctant to lend to SMEs, microenterprises and individual proprietors because of their smaller business sizes, lack of sufficient collaterals and higher risk of default. SMEs, microenterprises and individual proprietors may also subject to longer processing time associated with the loan applications. Microfinance companies thus fill the gap to provide micro and small loans to SMEs, microenterprises and individual proprietors.

Difference Between Rural Banks and Microfinance Companies

In general, the requirements of rural banks are higher than those of microfinance companies. Rural banks usually only accept first charge and microfinance companies usually accept first charge or second charge. With respect to the requirement on loan guarantor, rural banks usually require a medium or large enterprise to act as the guarantor and microfinance companies usually accept an individual or a small enterprise to act as the guarantor. Rural banks usually take a longer time than microfinance companies do to approve loans, but offer a more favorable interest rate.

Customers will decide whether to obtain a loan from a rural bank or a microfinance company by taking into account their own conditions for securing a loan and the degree of urgency of their fund demand as a whole. If customers fulfill the requirements of a rural bank for granting loans and do not have an urgent fund demand, they will usually choose to borrow from a rural bank and will not consider borrowing from a microfinance company. If customers do not fulfill the requirements of a rural bank for granting loans, or have a relatively urgent fund demand, they will usually choose to secure a loan from a microfinance company and will not consider borrowing from a rural bank.

As such, since rural banks and microfinance companies have different requirements for granting loans and time needed for approving loans, they have different customer base. Therefore, there is no competition between rural banks and microfinance companies.