Can private banks survive and thrive?

BEIJING -- With the last of the five pilot private banks approved to start operation, the market is hoping these newcomers fulfill the role of channeling more loans to small cash-starved businesses.

The Hangzhou-based MYbank was given the nod on Wednesday to open for business, following four others based in affluent cities Shenzhen, Shanghai, Tianjin and Wenzhou.

Focusing on serving small and medium-sized enterprises (SMEs), which are often denied access to bank loans, the first batch of five private banks are pioneering China's pilot scheme to gradually open its closely guarded banking sector. Currently, the sector is dominated by state giants.

Experts believe these private banks have the makings for success, given their low service charges, customer friendliness and integration with the Internet. However, challenges such as a lack of cash and immature industry oversight should not be overlooked.

NICHE MARKET

China's first private-run bank, China Minsheng Bank, was founded in 1996 in Beijing. The bank soon made its name and flourished through tailored lending to SMEs. However, the number of private banks failed to grow in China due to concern over systemic risks raised during the Asian financial crisis in 1997.

The demand for more private lenders increased a decade later when years of double-digit growth made China rich enough to withstand risks and carry out necessary financial reforms, while the state banking giants' arrogance towards the SMEs became intolerable.

Better service for SMEs is also justified given their growing importance - they now account for around 60 percent of China's gross domestic product (GDP) and provided 80 percent of of urban jobs.

The government set out to establish more private banks during a key policy meeting in 2013. A pilot scheme to set up more private banks was launched by the China Banking Regulatory Commission early last year.

A batch of five banks were planned, each with at least two private capital providers. More private banks will come into existence following the trial of these five banks.

Shanghai-based conglomerate Fosun Group was behind Huarui Bank while Internet behemoths Alibaba and Tencent had stakes in MYbank and Webank respectively.

"We'd rather be considered an Internet platform with a banking license [than a traditional bank as such]," said Gu Min, president of Webank.

The approval of a 20,000 yuan ($3,268) to 200,000 yuan loan in his bank only takes a few minutes.

"We have made an effort to streamline our services so that customers won't feel the lending process is stalled in any way," said Webank's deputy governor Huang Liming.

"Alibaba's online commerce platform was able to handle 30,000 deals per second during the November 11 shopping spree of last year. The success can be replicated in MYbank," said MYbank's deputy governor Zhao Weixing.

"MYbank is the first Chinese bank that's completely operated on a Cloud System, which ensures efficiency and lowers cost," Zhao said.

Webank and MYbank have both ruled out the establishment of bricks-and-mortar branch offices. Other three private banks said they would incorporate the concept of the "Intelligent Bank" to their limited number of actual offices.

"We will fully use our advantage of being familiar with SMEs and their financing needs," said Xu Zhiwu, vice president of Wenzhou-based Minshang Bank. The bank offers loans with a rate of around 8 percent, lower than the rate of other local lenders.

CHALLENGES AHEAD

Despite the banks' allure of better service and lower charges, several obstacles remain.

As the government has repeatedly cut interest rates and recently expanded the upper limit of the floating band of deposit rates to 1.5 times the benchmark from the previous 1.3 times, competition among banks for deposits has grown stiff.

Gone are the days when the banks could earn quick and big. Profit in the Chinese banking sector has slid from 30 percent four years ago to 5 percent in the first quarter of the year. Even state banks have to fight for a living.

Registered capital of the five private banks is tiny, with MYbank's 4 billion yuan being the most and Minshang Bank 2 billion the least. With such a limited capital, whether they can ensure sustainable development begs question.

Oversight on private banks for its healthy growth is also an outstanding issue.

"The existing rules are designed for the supervision of traditional banks, which are likely to be inapplicable to private lenders," said Chen Tie, investment director of Fosun Group, MYbank's shareholder.

"Technologies such as accurate facial recognition and tailored industry standards have to be there to make private bank's service of opening an account online safe," said Pan Shuangwen, an official at the People's Bank of China, the central bank.

"We must have patience in developing private banks," said Nan Cunhui, president of Minshang Bank.