The need for grassroot loans

An independent printing firm is increasing profits despite the economic downturn by rethinking its sales, pricing and packaging strategies. Yang Jieliang, owner of a printing firm in Wenzhou, Zhejiang province, changed his strategy last year as the global financial crisis began affecting his business.
To reduce costs, he offered smaller products with simpler packaging.
 
He also adjusted his sales strategy, including a decision to allow customers to pay later for his products.
As a result, Yang said, he received more orders for his greeting cards, gifts and stationery. While some of his competitors faced bankruptcy, Yang resolved to expand his business. That's when he discovered the pluses and minuses of private, unregulated lending.
 
Yang's export-oriented business had yearly revenues of about 20 million yuan, and he wanted to double that with the help of a 20 million yuan loan. However, traditional banks agreed only to lend him about 3 million yuan with the condition that he mortgage his house and other properties. Processing the loan would take weeks, he was told.
 
So Yang invested 6 million yuan of his own savings and borrowed the rest from private individuals.
During an interview with Xinhua News Agency, Yang did not elaborate, except to say that the money came from relatives and friends. In such cases, agreements usually are confirmed by signing a note. No contract is necessary. The money arrives quickly.
 
Such deals are beyond the legal reach of the government. They are underground, unprotected and unregulated operations. Yet the practice is common in Wenzhou. In fact, such grassroots financing has been called vital to the small and medium-sized businesses that make up more than 90 percent of the coastal city's enterprises.
 
Grassroots lending
 
A survey conducted by the Wenzhou Branch Office of the People's Bank of China found that private lending of this sort totaled 65 billion yuan at the end of May. Annual interest rates on such grassroots loans averaged 12.46 percent versus 6 percent charged by the country's licensed commercial banks, the survey showed.
Private lending relies in large part on personal relationships, but the lack of traditional collateral and other standards makes the practice open to default or fraud. The loss of State tax revenues also is a concern.
However, private lending has its defenders, too.
 
"Private lending is helpful. It's indispensable to small firms like mine," Yang of Wenzhou said Wenzhou has been at the forefront of China's economic reform successes with a strong small business sector.
"Wenzhou's free-flowing capital is huge. It is a profit-seeking and highly flexible city," said Ying Yixun, a professor at Zhejiang Financial College. "It gives strong support to small businesses to a level that commercial banks and the government failed to achieve," Ying said.
 
Business owner Yang recalled only one bad experience with private lenders several years ago, when a creditor asked him to return the money ahead of the agreed-upon time. Wenzhou's private financing practices are bolstered by a strong local demand from small and medium-sized businesses. The country's State-owned commercial lenders tend to favor big business clients, often reserving stricter lending requirements for smaller clients.
 
"The commercial banks used to be more generous about making loans. Now they are more risk-minded and are doing it grudgingly," said Liu Yang, general manager of CHINT Small-Sum Loan Co. He had worked with a State-owned bank for more than a decade before joining CHINT.
 
Small business loans
 
Of the approximately 140,000 enterprises in Wenzhou, only 600 recorded more than 100 million yuan in annual revenues, Liu said. "In the eyes of the State-owned bank, small businesses are inferior clients. They don't usually have assets that can be mortgaged. They borrow in small amounts and pose a greater risk," Liu said.
 
"The State-owned commercial banks tend to neglect this part of business. So do the State-owned rural credit cooperatives," Liu said. Printing firm owner Yang said that's why private lending is useful. "The poor help the poor. A private firm borrows from a private lender, " Yang said. Recently, the banking sector welcomed the introduction of small-sum loan companies to bridge the gap between big banks and private, unregulated lenders.
 
Small-sum loan companies are created by multiple investors with seed funds of no more than 200 million yuan. The company is required to lend 70 percent of its money in small sums to small businesses.
Eight small-sum loan companies opened last year in Wenzhou. They are not without challenges. The capital fund of a small-sum loan company usually is loaned within one to two months.
 
Because it does not enjoy the status of a bank, a small-sum loan company is not allowed to accept deposits. It is permitted to borrow from the bank a sum equal to as much as half of its registered capital. Other than that sum, the company can only use repaid money to make new loans. Small-sum loan companies are allowed to charge higher interest rates than traditional banks.
 
Statistics showed the eight small-sum loan companies and two township banks in Wenzhou cumulatively loaned 3.826 billion yuan by the end of May. But there still is a huge demand for so-called grassroots financing; otherwise, the government would not ignore its illegal nature.
 
So the operation of Wenzhou's grassroots financing remains a legal gray area. But the help of grassroots financing to the city's numerous small enterprises, especially in their efforts to weather this economic storm, should not be under-estimated.
 
Xinhua
 
http://www.chinadaily.com.cn/bw/2009-09/14/content_8687021.htm